Moody’s Cuts Portugal’s Sovereign Debt Rating Two Notches to A1

The reporting so far is thin, just notices of the announcement at Bloomberg and the Wall Street Journal that Moody’s cut the rating on Portugal’s sovereign debt from Aa2 to A1. The Bloomberg headline notes that Moody’s put the outlook as stable, while the Journal pointed out that the agency expected “Portuguese government’s financial strength will continue to weaken over the medium term.”

Predictably, the euro weakened a bit, but at least so far, the reaction appears subdued. Stock indices are still in positive territory. However, this change will likely increase scrutiny of Eurobank stress test assumptions and results, with those findings due to be released July 23.

Update 6:00 AM. FT Alphaville explains why the market ignored the downgrade. Many investors regard A1 as still too high:

Indeed, the downgrade has had a minimal impact on Portugal’s CDS and the euro’s dip this morning has more to do with the lower-than-expected German ZEW headline than the Moody’s downgrade.

So what then should Portugal really be rated?

In the view of Harvinder Sian at RBS it should rated at least BBB:

I think Portugal should be rated with a BBB handle (minimum). The low nominal growth trend is chronic and means that the good record of fiscal austerity is less relevant. More importantly, the total economy debt is near 350% of GDP, with non-resident borrowing (both public & private sectors) at 205% of GDP, meaning that the adjustment to a more risk-off world will be painful and needs to be carefully managed by European authorities.

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2 comments

  1. IsabelPS

    Oh well.
    From my back porch I hear the noise of the Estonians’ party celebrating the fact that they will adopt the euro in 2011…

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