Moody’s Portugal warning is too soft
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.