Portugal's junk bond rating: Another European financial disaster?

On Tuesday, Moody's Investment Services downgraded Portuguese government bonds by four notches, to "junk" status. The ratings agency justified the move by saying Portugal, like Greece, would likely need a second rescue package to avoid collapsing under the weight of its debt. The "unexpectedly harsh" downgrade sent stocks plunging, and safer bonds rising in neighboring Spain, as investors fear the debt crises that hammered Greece and then Portugal could spread to other large European countries. Is Portugal really slipping into a Greece-like debt crisis?

Portugal is doing better than Greece: Portugal's in a tight spot, but it's no Greece, say Gilbert Reilhac and Annika Breidthardt at Reuters. Greece "has a much higher debt ratio," and while the Greeks had to be pushed to accept belt-tightening measures, "a new center-right Lisbon government announced austerity plans going beyond international lenders' demands." That's why European leaders are accusing Moody's of acting on an anti-Europe "bias" rather than any real change in Portugal's plight.

"EU slams ratings agencies after Portugal downgraded"

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

But investor caution is still justified: It's obvious that "the European debt crisis is far from over," says Tom Petruno at the Los Angeles Times. Moody's isn't writing off Portugal, it's just saying there's a growing risk that "Portugal wouldn't be able to slash spending fast enough to meet European Union goals" required under the initial bailout deal agreed to this spring. Investors who hold Greek bonds might some day be forced to accept lower interest rates if Greece's debt is restructured, and if that happens, Portuguese bond holders could be "forced into concessions" next.

"Portugal debt cut to junk rating by Moody's on fears another bailout looms"

And it is surprising that Moody's was so harsh: Portuguese Prime Minister Pedro Passos Coelho likened the downgrade to "a punch in the stomach," says the Associated Press. Even Barclays Capital Research said the severity of Moody's downgrade was surprising, and more like a reaction to Greece's plight than Portugal's. But the country is undeniably in a recession, and its "grim economic prospects will likely make it harder for Portugal to settle its debts, propelling it into a downward spiral" that could suck neighboring countries down with it.

"Portugal reels from credit downgrade to junk status as loan rate rises, stocks slump"