May 22, 2017 / 5:01 PM / 3 months ago

UPDATE 1-Portugal says EU decision on deficit marks turning point

(Adds comments, bond yields)

LISBON, May 22 (Reuters) - Portugal's finance ministry said on Monday the European Commission's recommendation to end the disciplinary process for its excessive budget deficit marks a turning point and shows growing confidence in the economy by international institutions.

Portugal reduced its budget deficit in 2016 to 2.0 percent of gross domestic, down from 4.4 percent in 2015 and its lowest since 1975, marking the country's first exit from a European Union disciplinary process since 2009.

However, officials and business leaders said Portugal still needs to cut its debt burden in order to regain its investment grade rating lost in the aftermath of the 2011 debt crisis and subsequent EU/IMF bailout. It exited the bailout in 2014.

"This decision is a turning point to the extent that it expresses the evaluation of the commission that Portugal's excessive budget deficit has been corrected in a sustainable and lasting way," the ministry said in a statement.

"Confidence in the Portuguese economy is beginning to be reflected by international institutions," it said.

The government was "fully committed" to keep implementing ambitious reforms, the ministry said.

"The next determining step ... is to work together for a sustainable improvement in growth and a debt reduction, so that rating agencies can change their marks on the country," said Nuno Amado, CEO of Portugal's largest listed bank BCP.

He said growth was picking up this year after a slowdown in 2016, but without a clear reduction in debt levels, a rating improvement was unlikely.

Only one rating agency recognised by the European Central Bank, Canada's DBRS, has an investment grade rating on Portugal's debt, while the three major agencies - Moody's, Fitch and Standard&Poor's - rate it one notch into "junk" territory.

As a result, Portugal's debt premiums are still among the highest in Europe despite a recent fall that outperformed other issuers. At about 130 percent of GDP, the country's debt is the highest in the common currency area after Greece and Italy.

Portugal's 10-year bond yield fell to seven-month lows of 3.15 percent on Monday after the Europe Commission decision.

Carlos Moedas, European commissioner for research, science and innovation, who is Portuguese, praised progress in cutting the deficit and said the commission's decision means Portugal would be freer to define its policies and attract investment.

"But on the other hand, we remain a very indebted country and we still have to reduce our debt," he said. (Reporting by Axel Bugge, Daniel Alvarenga and Andrei Khalip; Editing by Louise Ireland)

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