Global Policy Forum

Portugal Looking More Like Greece

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Mario de Queiroz
IPS

May 7, 2010


LISBON - Portugal is caught in the crossfire between credit rating agencies and international financial speculators who see this country as offering an excellent opportunity to turn a quick profit.

This time it was Moody's turn. The ratings agency warned Thursday that the debt crisis in Greece could spread to banking systems especially in Portugal, but also in Spain, Ireland and to a lesser extent Britain and Italy.

The report says these banking systems "have weakened from within, often due to excessive loan growth" and the "bursting of the real estate bubble."

Moody's, which like the other agencies sells its financial analyses and ratings of companies and governments, adds that the "contagion could potentially also spread to these banking systems where sovereign creditworthiness has been impacted by developments within the banking system."

Moody's Investor Services also warned it may downgrade Portugal's AA2 debt rating in the next three months, just a week after its main rival, Standard & Poor's, did so.

Citing a weakening in Portugal's public finances and its long-term growth prospects, senior Moody's analyst Anthony Thomas said that "in the context of a small and slow-growing economy, Portugal's debt metrics may no longer be consistent with an Aa2 rating".

The warning shook the markets. Stocks on the Lisbon stock exchange plunged to lows not seen since July 2009, while the cost of insuring Portuguese government debt against default soared to the highest level since the euro was introduced in 2002.

Meanwhile, a statement by the International Monetary Fund (IMF) denied rumours that Spain or Portugal were seeking huge emergency loans.

Three people were killed in Greece Wednesday when protesters set fire to a bank in downtown Athens during a nationwide strike against stringent austerity measures imposed as part of a massive 142 billion dollar bailout by the EU and the IMF. The deaths, the first to occur during protests in nearly 20 years, were the harshest reflection of the depth of the country's collapse.

In a joint letter published Thursday by the French daily Le Monde, German Chancellor Angela Merkel and French President Nicolas Sarkozy said budgetary oversight over the 16 countries that use the euro should be reinforced.

The leaders of Europe's two strongest economies called for "more efficient sanctions" against those who violate deficit limits and for "a robust framework" for dealing with crises to avoid a repeat of the current situation.

At the end of a meeting of European central bank governors in Lisbon Thursday, Jean-Claude Trichet, the president of the European Central Bank (ECB), said "Greece and Portugal are not in the same boat...."This is obvious when you look at the facts and figures."

He also announced that the ECB decided in Lisbon, for the 13th month in a row, to hold Eurozone interest rates at the record low of one percent.

All of this occurred just a week after Standard & Poor's cut Portugal's credit rating.

The fact that the credit ratings agencies are not actually international, but are from the U.S., has made European politicians, economists and analysts wary that the ratings might favour speculation by U.S.-based transnational banks.

In the view of two economists who were ministers during conservative governments in Portugal, Antonio Bagão Félix (2002-2005) and Luís Mira Amaral (1985-1995), the warnings from the credit agencies should be taken as "a serious notice" because "they bring Portugal to bay" in the international markets.

According to Mira Amaral, the credit rating cuts and warnings translate into "a chain reaction from the credit rating agencies that will have serious consequences for Portuguese families," due to the rise in interest rates on loans, a view shared by Bagão Felix.

Finance Minister Fernando Teixeira dos Santos declined to respond to Moody's report, but defended the idea of the creation of a European credit rating agency, because "the U.S. monopoly in this field is not healthy for the world."

Nouriel Roubini, professor of economics and international business at New York University, recently wrote that "The Greek financial saga is the tip of an iceberg of problems of public-debt sustainability for many advanced economies, and not only the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain)."

The acronym was coined in the 1990s to refer to the poorest countries in the EU, but it also now refers to nations with high government debt levels and slow growth rates.

In a mid-April oped posted by Project Syndicate, an international not-for-profit newspaper syndicate and association of newspapers, Roubini wrote that "Within the PIIGS, the problems are not just excessive public deficits and debt ratios...They are also problems of external deficits, loss of competitiveness, and thus of anemic growth."

He pointed out that "even a decade ago" the PIIGS were losing market share to China and Asia, because of that region's "labour-intensive and low value-added exports."

Roubini warned that if GDP falls, "achieving a certain deficit and debt target (as a share of GDP) becomes impossible. This, indeed, was the debt death trap that engulfed Argentina between 1998 and 2001."

Greece's GDP shrank two percent in 2009. "Short of a miracle, Greece looks close to insolvency," Roubini wrote, pointing out that the southern European country had a more alarming budget deficit, public debt and current-account deficit than Argentina at the start of its financial meltdown.

But "Greece is currently too interconnected to be allowed to collapse," he wrote three weeks ago, noting that three-quarters of the country's 400 billion dollars in public debt is held abroad, mainly by European financial institutions, which means "a disorderly default would lead to massive losses and risk a systemic crisis."
 

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