Moody’s Downgrades Portugal–Throws It Under The Bus

The reasons Moody’s gave for the action were political instability, “short and medium-term funding challenges,” and negative revisions in the Portuguese budget. The capital markets all saw these things on the horizon so none of them comes as a surprise. The nation’s Prime Minister José Sócrates recently left after his austerity program was rejected by the Parliament.

At nearly the same time as Moody’s slashed Portugal’s rating, Spain’s Premier José Luis Rodríguez Zapatero stepped down. The move may be clever. Some analysts say that Spain’s political parties will rally behind Zapatero because he is viewed by investors as the catalyst of Spain’s austerity program. Such an action is futile when it comes to Spain’s finances. The nation still has a 20% unemployment rate and a deeply troubled banking system. Spain’s states have similar problems to the weakest ones in the US. They are not easily self-funded because of concerns about their financial liabilities.

Ireland’s problems are different from Greece’s but they may have similar results. Ireland wants better bailout terms, particularly as it nationalizes its banks. IMF and EU lenders may reject this and cause another crisis around the country’s finances. Greece is now seen by many investors as a candidate for default and there  are rumors that some forces in Europe have encouraged it. If Greece defaults and forces capital markets investors to carry some of the load along with the EU, maybe the model can be used elsewhere. That would cause unprecedented chaos in the capital markets, but sovereign nation leaders have committed stupid acts under pressure before.

There has been a hope that the financially weak nations in Europe would look less and less like one another. Greece would be the straggler and austerity would salvage the fortunes of others like Portugal. It has not worked out that way.

Douglas A. McIntyre