Moody's Cuts Portugal Debt Four Levels to Junk, Warns of Second Bailout; Reflections on "Political Will"

It can't be contagion because we all know "Greece Has Been Saved". Nonetheless Moody's cuts Portugal to junk, warns of second bailout

Moody's Investors Service slashed Portugal's credit rating by four levels, to Ba2, causing the debt-laden Iberian country to follow Greece into junk territory below investment grade. Greece is rated much lower, at Caa1.Moody's said there is an increasing probability Portugal will not be able to borrow at sustainable rates in capital markets in the second half of 2013 and for some time thereafter.

There was a "growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition," Moody's said.

Some economists think Ireland may also need additional support, and investors worry Spain and Italy could be next in line for aid.

"It goes to show that this whole crisis isn't over just yet," said Jay Bryson, global economist for Wells Fargo Securities in Cape Hatteras, North Carolina. "Even if they cough up some more money for Greece, and that looks like it's a done deal, it's not over."

Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said Moody's move was "a bit extreme" and was likely to exacerbate concerns over Portugal's debt.

"Either they don't believe in the power of the political will by the European Union to avoid default, or they are underestimating this political union," he said.

Political Will vs. Reality

There would never have been a sovereign default in history if "political will" was a guaranteed savior.

Greek 2-year bonds are trading at 26.91%. They opened today at 26.03%.

The market does not think much of "political will" and neither do I.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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