Next Up on Bailouts: Portugal?

Moody's considers downgrading Portugese debt

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Tuesday, Moody's, the credit rating agency, put the Portugese debt "on review for a possible downgrade." Recent bailouts for Ireland and Greece have made international markets increasingly nervous about Portugal, causing "the cost of insuring Portuguese sovereign debt against default" to rise and the euro to fall slightly, Reuters reports. Though thus far Moody's does not doubt the stability of Portugal's banks, the decision to put the country on review stems from concerns for Portugal's "longer-term economic vitality."

Moody's overall outlook on Portugal seems to be a positive one, however. "The government expects the economy to grow at least 1.3 percent this year after 2009's 2.6 percent contraction. It hopes exports growth will help it avoid a new recession predicted by many economists for next year, when it forecasts 0.2 percent growth despite austerity measures that include higher taxes," the Reuters report notes. Financial bloggers, though, have their own opinions of the significance of the changes in the Portuguese economy.

  • A Bleak Future  Moody's may be positive about Portugal's future, but at 24-7 Wall Street, Douglas A. McIntyre offers a more pessimistic take on the latest debt news. McIntyre notes that Moody's assessment of Portugal "bear(s) an uncanny resemblance to comments about Ireland and Spain recently made by one or more of the three credit agencies" and that whatever the outcome of the Moody's review, Portugal will have to "fight for its financial independence" as the international community continues to lose faith in the stability of Europe's smaller economies. "There are no huge and ready pools of money to put capital into nations like Portugal. The country's eurozone neighbors will not help it. 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," he predicts.
  • Stable for Now, But Hard to Predict  Marc Chandler at Credit Writedowns suggests that Moody's decision to review Portugal for a potential downgrade may have "nipped the euro recovery in the bud," but doesn't necessarily guarantee the market won't veer from its predicted course. "We also note that euro zone sovereign ratings are a moving target, with budget and debt numbers set to deteriorate further in 2011," he clarifies.
  • A Possible Solution to the European Economic Problem  Reuters blogger Felix Salmon suggests that a politically unappealing compromise might be the only way to solve the European economic crisis. "Either the peripheral countries start defaulting, or else the eurozone becomes a fiscal union as well as a monetary union," he writes. Salmon predicts that the countries involved will only agree to one of these two moves "if it's in their political interest to do so; until then, some European institution or other will always be there, in extremis, to bail them out and provide the extra few billions needed to plug whatever budget gaps might be temporarily ineradicable. If you're going to implement a fiscal union out of necessity that way, you might at least make a virtue of it by imposing a common set of banking standards at the same time."
  • Oddities in This Review  Upon reading the news of Portugal's potential downgrade, Financial Times Alphaville's Joseph Cotterill both suggests that risk is spreading (beyond the "eurozone periphery" region) and dives into the factors involved in Moody's ratings decisions.
Two notes of caution ... First, Moody's five-notch downgrade of Ireland last week dealt with the consequences of what happened when Irish banks' refinancing needs were indeed thrown on to the sovereign balance sheet. ... Furthermore, it's interesting that Moody's didn't discuss the European Stabilisation Mechanism here. It did when placing Greece's ratings on downgrade review recently, given the way the ESM will facilitate bond bail-ins if Greece needs more eurozone support after 2013. That will be something to worry about over Portugal, too, if it does access the EFSF.
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