Credit-ratings agency Moody’s downgraded Portuguese debt by four notches to junk status. It is concerned that Portugal won’t be able to meet its deficit reduction targets and will need a second rescue package before it can tap markets for more debt. Earlier this week, another ratings agency, Standard & Poor’s, said that a European plan for private investors to roll over Greek debt would prompt it to declare a Greek default. The rollover plan is part of a second bail-out for Greece set to be finalised later this summer.
What the commentators said
“The key worry of the market is that the events we’ve been seeing with Greece are being repeated with Portugal,” said Michael Leister of WestLB. Portugal aims to cut its deficit from 9.1% of GDP to 3% by 2013. But it will struggle to meet its targets. Not only is “tax compliance” a problem, as Moody’s noted, but the economy has suffered a “shocking loss of competitiveness”, said Andrew Garthwaite of Credit Suisse. It has a current-account deficit of 9% of GDP and has grown by just 0.5% a year over the past decade, despite a big rise in government spending. Moreover, the private sector is soaked in debt worth a colossal 230% of GDP. “We… would [be] shocked if [Portugal] does not default.”
But beyond Portugal’s “high-debt, low-growth mash-up”, said John McDermott on FT.com, there’s another problem. It stems from how the EU has addressed the Greek crisis. Insisting on private bondholders becoming involved in the rescue package, said Moody’s, is likely to discourage new private-sector lending. This reduces the chance of Portugal returning to the markets on sustainable terms. That in turn makes a new rescue package more likely. As bad news piles up in the eurozone, said Fxpro.com, “there is still no sense that EU leaders have moved… ahead of events”.