Portugal's Downgrade May Make Default Inevitable

Sovereign debt downgrades are usually a self-fulfilling prophecy.

Moody's or another agency threatens a downgrade or actually makes one. This causes the country which faces the action to explain to the capital markets why the risks of investing in its debt are not so risky. Investors become skeptical, which drives up what the nation must pay in interest. Those higher interest rates make it nearly impossible for the country to fund its deficits.

Moody's placed Portugal's A1 long-term and Prime-1 short-term government bond ratings on review for possible downgrade. The credit agency listed among its reasons:

(1) Uncertainties about Portugal's longer-term economic vitality, which will be exacerbated by the impact of fiscal austerity;

(2) Concerns about Portugal's ability to access the capital markets at a sustainable price; and

(3) Concerns about the possible impact on the government's debt metrics of further support for the banking sector, which may be needed for the banks to regain access to the private capital markets.

These bear an uncanny resemblance to comments about Ireland and Spain recently made by one or more of the three credit agencies.

Capital markets investors complain that the rating changes come after credit problems are already well known. The ratings agencies say, in response, that it is only prudent to issue comments until there has been a careful examination of each situation. Neither point-of-view matters much to Portugal. It will have to continue to fight for its financial independence as the pessimism about the fates of Europe's smaller nations increases.

The EU has decided not to offer unconditional support for countries like Portugal. Germany, the largest economy in the region, says it does not have bottomless pockets. A decision by the country to offer a tremendous amount of capital to support its neighbors would eventually damage its own rating, Germany says. The comments have the power of being true. China, the largest investor in sovereign debt, has also said it is worried that the countries in Europe have not found a way to solve their financial problems. If China becomes reluctant to invest in the region, borrowing costs might even go higher.

It is obvious to say that downgrades will continue as deficits in the region grow and the interest rates that must be paid on bonds rise. It is equally obvious that none of the financial organizations in the EU have offered a solution to the problem which can calm investors.

All of these problems have caused a desperate search for solutions. But there are not any. The lines have already been drawn. There are no huge and ready pools of money to put capital into nations like Portugal. The country's eurozone neighbors will not help. A default is nearly inevitable. It will be rescued, but by that time it will no longer be sovereign. The price will be too steep.

Presented by

Douglas A. McIntyre

Douglas McIntyre is editor of 24/7 Wall St.

Saving the Bees

Honeybees contribute more than $15 billion to the U.S. economy. A short documentary considers how desperate beekeepers are trying to keep their hives alive.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus


How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well.


Before Tinder, a Tree

Looking for your soulmate? Write a letter to the "Bridegroom's Oak" in Germany.


The Health Benefits of Going Outside

People spend too much time indoors. One solution: ecotherapy.


Where High Tech Meets the 1950s

Why did Green Bank, West Virginia, ban wireless signals? For science.


Yes, Quidditch Is Real

How J.K. Rowling's magical sport spread from Hogwarts to college campuses


Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

More in Business

Just In