A Ratings Cut In Portugal As Inflation and Japan Loom

Moody’s cut the sovereign paper of Portugal from A3 to A1 with a negative outlook. The reasons were too few. They included  a fear that the economy and productivity will not grow fast enough, worries about government consolidation, the ability of the government to support its bank sector and capital market conditions which may damage an already difficult national debt situation.

Moody’s laid out the background and its analysis of these four problems in great detail and added a caution that a failure of government restructuring or a slowdown in the EU economy could cause future downgrades.

The weaknesses of  the debt ratings of  EU governments are almost always the same. They do not take into account enough the global economic problems some of which originate as far away as Asia. Japan’s problems and the widespread effect they could have on the GDP of Asia were not mentioned in by Moody’s although they are part of the fabric of the risk that the worldwide economy faces. Moody’s has neatly swept that issue under the rug which means future ratings of any of the sovereign paper issued by weak regional governments may be hurt in the future if the trouble in Japan worsens.

Inflation is the other issue that Moody’s largely ignores. The effects of higher crude prices may be lessened by an anticipated drop in Japan’s demand. That is balanced by potential trouble in Saudi Arabia which has followed upheaval in much of the Middle East and northern Africa. That aside, food prices continue to rise and so do the costs of other essential agricultural commodities, especially cotton. There is no reason the upward pressure on these prices will stop.

Moody’s, S&P, and Fitch have already had their ability to judge risk undermined by the credit crisis. Their failures to put enough weight on global problems as they downgrade ratings of weak countries across Europe will be remembered as another mistake of a mistake-prone model.

Douglas A. McIntyre