More on Tuesday’s downgrade of Portugal (and, to a lesser extent, Greece) from the excellent Harvinder Sian at RBS.
He reckons S&P are spot on with their decision to cut Portugal to BBB- (with the ratings outlook negative) and says there a real risk of a downgrade to junk.
As highlighted in our earlier post, part of the reason is seniority of Europe’s future bailout fund, but there are others:
1. A rescue for Portugal looks very likely and will add 47% debt/GDP to the Portuguese numbers once they enter the EFSF. This is based on expectation that Portugal will need EUR 80bn in the EFSF bailout.
2. The structural reforms that Portugal needs to absorb will not see a payback for several years and so they will be rolled into the ESM in July 2013. The ESM will be a senior creditor.
3. That means Portugal will need some very strong private and public sector balance sheets to come to the market, along with evidence that its lack of competitiveness has been turned around. This process will last a couple of electoral cycles and puts into question the feasibility of austerity over such a long period. In our note on Portugal, we said the biggest deficit in Europe for future years will not be the current account and budgets, but the democratic deficit in which core countries impose serfdom on the periphery.
All of which, says Sian, will probably result in more distressed selling of Portuguese government debt. And it also has read across for Ireland and Greece.
For Greece, the downgrade has lost much meaning but the arguments around Portugal are also true here, but with a higher starting debt load and a less compliant population.
Ireland is conspicuous by its absence in these headlines (rated by S&P at A-). This is wrong. We think Ireland has (a) good growth potential; (b) need not die at a peak debt load of 125-30%; (c)…. but we can not ignore the ESM as a noose around the neck of Ireland’s ability to exit the bailouts and austerity. It was pivotal in bring forward a crisis in Ireland last autumn and remains the key now.
Indeed.
Related links:
That tricky ESM seniority – FT Alphaville
That tricky ESM seniority – still tricky – FT Alphaville
Calculating the size of a Portugal rescue – FT Alphaville
Portugal’s negative cash flow – FT Alphaville