Moody’s Portugal warning is too soft

December 21, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — Sometimes ratings agencies don’t see trouble coming at all. But more often they spot risks and are reluctant to draw ugly conclusions. Just consider Moody’s comments as it put Portugal on negative watch on Dec. 21.

The agency says it has concerns about Portugal’s “long-term economic vitality”. Yet it adds that the nation’s solvency is “not in question”. It points out that the bond market has remained open to the country, while noting that the price at which debt is sold is “elevated”. Far more elevated, Moody’s might have said, than six months or a year ago. That gradual ratcheting up of financing costs is precisely what tends to happen as a country heads towards crisis.

Portugal’s profound macroeconomic problem is indeed a lack of vitality. The economy struggled to grow even in the first seven happy years of the euro when the government ran a cheaply funded deficit and the banks were able to tap euro zone capital markets at extraordinarily cheap rates. The challenge now is to generate the revenues needed to service all that accumulated debt even as the government imposes austerity.

The challenge of running faster is all the greater because the accumulated debt is such a massive burden. The government has made little progress in improving its fiscal position. Debt is estimated to exceed 80 percent of GDP. Meeting the target for a still very large fiscal deficit of 7.3 percent of GDP this year looks a struggle. That deficit will add to the country’s debt, whose upward trajectory is something all investors can see.

In 2011 recession is likely. Growth prospects after that look poor. The country does not have a strong industrial base and does not look competitive. Even with the country in recession, the trade deficit is big, which implies a need for external funding. Portugal’s lenders are, as Moody’s says, reliant on the European Central Bank.

How long can that continue? Portugal seems almost certain to require a bailout. That would provide short-term relief for a country struggling to keep up on its payments to creditors. But without some fresh catalyst, the long-term vitality problem that Moody’s identifies would remain unsolved.


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It’s amazing how someone in the UK, whose debt has actually increased A LOT this year has recent numbers have revealed has the courage to talk about the Portuguese situation like this. Portugal is actually succeeding in reducing its deficit, which will be lower than Britain this year (it was already lower than Britain’s last year).

And the banking system of Portugal is only shut down from the markets because of recent rating’s agencies downgrades, so they created a vicious circle, they downgrded the banks, making it hard for them to tap the markets, and then accuse them of not tapping the markets and hence being to dependent on central bank financing! A job well done to reduce the Portuguese economy to nothing, and if there was any justice in this world, countries like the UK, France, the US would never have a triple-A rating, I understand the prudence of the agencies, but attacking the weaklings of Europe will lead to nothing – they are always late in predicting whatever comes anyway – and their decisions affect the lives of millions of people around the world, it happened in the US with the subprime crisis, in Argentina, etc. etc. etc. who are these people?

Posted by Antonio78 | Report as abusive

The dominoes are beginning to fall Spain next followed by Italy. Its inevitable that the Euro in its current form cannot continue. Germany will exit the Euro and the EU. The EU without Germany,s funding will have to thoroughly reform which will mean cutting that horrendous bureaucracy and finally abandoning the CAP. The PIGS will then be allowed to devalue which is the only way they will sort themselves out of this mess. Then hopefully governments worldwide will behave with financial prudence.

Posted by sunny171258 | Report as abusive

If you want to see a visual effect of Portugal’s disarray, take a look at Google’s Street View. Portugal’s people seem to take pride in unsightly graffiti. Especially Lisbon. It’s a long road from dictatorship.

Posted by ogobeone | Report as abusive