More Ratings Agency Woes For Portugal

By: Dr. Mike Campbell

Ratings agency Moody’s has decided to downgrade Portugal’s debt rating by two notches to A1 (from AA2). This may serve to re-ignite the Eurozone sovereign debt crisis and indeed, the Euro was somewhat lower against both the Dollar and Sterling. However, the fall was muted, probably because another agency, Standard and Poor’s has had the Portuguese rating two grades lower (A-) for some time. Neither ratings agency has downgraded Portuguese debt to “junk” status (this label simply suggests that there is a more appreciable risk of a default on the debt than would be the case for an “investment grade” debt).

It could be that the markets have already priced Portuguese risk into their assessment since the Euro has been recovering on the forex markets over the past few weeks. Concern over sovereign debt within the Eurozone is hardly “breaking news”. The major impact of the Greek debt crisis (which is much worse than the problems facing Portugal) hit the single European currency in early May and has seen the Euro fall by nearly 17% against the Yen over the course of the year (although it has started to recover some ground).

Ratings agencies are commercial companies that earn commission on bond (and other debt) issues by providing an assessment of the risk associated with the offer – the lower the risk of a default, the better the rating that the agency gives the product. The EU is already bringing in measures to make the process more transparent and accountable within the EU area. The ratings agencies have remained mute about the massive debts in the worlds two largest economies so far.