Will Moody's downgrade of Portugal to junk save Greece?

07/05/2011 6:31 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

And then there were two. Today, July 5, Moody’s Investors Service cut its rating on Portugal’s government bonds to junk—actually Ba2, two levels below investment grade. Greek government debt has been rated junk since April 2010.

The warning today has to feel like deja vu all over again. Greece negotiated a first rescue package in 2009; Portugal got approval on its $116 billion rescue in May. Greece has had to come back to the European Union with a request for a second rescue this year. Moody’s warned that Portugal may need a second rescue package soon because of “formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth, and supporting the banking system.”

Oddly enough, I think the downgrade to junk for Portugal is actually good news for Greece. The strongest argument pushing EuroZone leaders to agreement on a second rescue package—in the face of strong voter disapproval in funding countries—has been the contagion argument. “If we don’t save Greece,” the argument goes, “then Portugal and Ireland and maybe Spain or Italy will head into crisis too. Better to contain the damage here.”

That line of reasoning looks stronger today after the Moody’s call. Politicians and even, probably, some voters can see contagion at work. The more parallels between Greece and Portugal there are, the stronger the case seems. And the more likely that European political and financial leaders will patch something together.

 

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