Wednesday 6 July 2011

Moody’s decision was correct…

… if one accepts the ratings agencies’ view that the debt rollover involving private creditors proposed for Greece should be considered “default”. Given that the consensus seems to be that Moody’s decision is absurd, I feel I must explain my previous post and the previous sentence. Considering that:
1. The Portuguese “program entails important risks” (see the IMF’s staff report, page 23, available here), “in particular, refinancing risks”;
2. If the program fails to deliver the results projected, additional official financing will be necessary; i.e. there is an “important” probability that Portugal will need new financing from the European Financial Stability Facility (EFSF), which implies approval from all the Eurogroup governments;
3. It is very likely that France and Germany will apply the principles of the latest Greek program to all future EFSF financing, requiring private creditors to rollover their debts, an event ratings agencies consider to be “default”.
Then, there is “very likely” an “important” probability that an event called “default” will occur, regarding Portuguese debt. That is exactly what a junk rating means, that there is a important probability of default.
This also means that Portugal’s downgrade has nothing to do with Portuguese fundamentals, but it is related to the fact that France and Germany are requiring private creditors to rollover their debts.


  1. Quite right, the ratings downgrade has more to do with the War of Nerves between the international private investors and the Eurogroup of official creditors about who will share the costs of the rescues.

    If the rescue packages were unconditional, there might not be any downgrade at this time.

  2. Dear Álvaro, you're wrong for several reasons:
    1. The IMF report was issued in June, a few weeks after the IMF itself approved the Portuguese bailout - and this means that these are old news, well-known for at least a month before Moody's downgrade;
    2. The notion that the Greek debt rollover involving private creditors should be considered as default is way far from being considered consensual. Actually, this is more of a political statement than a truly economic-based evaluation;
    3. The Greek debt rollover involving private creditors has been predicted several weeks ago.

    So, downgrading Portugal right after the new government announced an important privatization programme has nothing to do with economics. In technical terms, there are no objective economic indicators that sustain Moody's announcement.
    if we aim to analyze it from an economic science point of view, Moody's was wrong and has withdrawn conclusions that lack scientific basis.
    This is politics, and nothing but politics.

  3. This may be more than just politics too, such as Moody's trying to keep itself relevant and attempting to saving face after losing all credibility, along with most international ratings agencies, when during the 2008 crisis everything was AAA until overnight (and often after the fact) everything was downgraded straight to JUNK status when the truth was discovered.

    Place your bets ladies and gents, but if your bets are based on rating agency credit gradings... well, all I can say is, good luck with that!

  4. That is why I understand the complaints to the Spanish courts and to the portuguese public prosecutor (PGR)!