Euro Falls As Portuguese Credit Rating Is Downgraded

By: Mike Campbell

There is an undeniable feeling of déjà vu in the air. The Euro has come under pressure against Sterling and the Dollar and European markets have dipped into contraction (albeit marginally) as the ability of another Eurozone country to pay its debts is called into doubt. This time the spotlight has fallen on Portugal. Once again, it is credit ratings agency Fitch Ratings who has been first to make a downwards correction to the nation’s credit worthiness, dropping the grade from AA to AA-. According to Fitch’s Douglas Renwick, the move was necessary because "A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal's creditworthiness."

The Portuguese government already has what Fitch described as “credible” austerity measures in place which are designed to tackle the country’s debt problem. The deficit last year had climbed to 9.3% of GDP; more than 3 times the permissible level under Eurozone rules. The increased public expenditure was aimed at battling the effects of the global recession within Portugal. The government plans to reduce the deficit by 1% this year and have it back on track by 2013.

The EU will meet later today with the debt crisis and its consequences firmly at the top of the agenda (although the focus will remain on Greece). There is considerable external pressure on the major Eurozone partners to announce concrete measures to ensure that Greece has access to the funding it needs and can avoid the danger of defaulting on its debt. It seems increasingly likely that the solution may call on backing from the International Monetary Fund as French objections to the move have been withdrawn. Germany still believes that no firm action needs to be taken until it is clear that Greece cannot manage the problem on its own. Against this backdrop, if anything other than a clear position from EU leaders emerges after today’s meeting, the Euro will be forced significantly lower.