Portuguese Junk

Regrettably, this is not a paid advertisement for Brazilian sex vacations. It is another reminder of why the first letter in PIIGS is P. The abrupt four notch Jack the Ripper-ing of Portuguese debt by Moody’s is yet another sign of the collective global financial machinery finally getting serious about dealing with welfare states.

Portugal's credit rating has been downgraded to junk status by Moody's Investors Service, which said the growing risk of a second bailout and the European Union's likely insistence on private sector involvement in any further rescue package formed the basis of its decision.

The government of new Portuguese Prime Minister Pedro Passos Coelho is implementing a series of tough austerity measures which are a condition of the EU and International Monetary Fund's €78bn bailout agreed in May – but Moody's claims that loan will not be enough. It has slashed Portugal's long-term government bond ratings four notches from Baa1 to Ba2. In the wake of the downgrade European banks shares fell, the euro was down against the dollar and the yields on Irish, Greek, Spanish and Italian government bonds increased.

The logic behind Moody’s decision is that Portugal will essentially run out of borrowing options at the end of 2013. The Portuguese (like the Greeks) are complaining that none of this is fair.

I am shocked. Truly.

Digressing aggressively back in time to 1974 and Portugal’s military coup, known as the Carnation Revolution. There was a realistic danger of Portugal being taken over by the communists for a time. Henry Kissinger was instrumental in spearheading an aggressive American diplomatic effort against this potential occurrence.

Think of the embarrassment of a NATO country becoming communist during the Cold War. Who knows what could have happened. I suspect not too dissimilar are the thoughts of many EU members today with regards to a potential Portuguese, Greek, etc…bankruptcy. I am not talking about political leanings, but about unpredictability.

I have said it before and I will say it again, calling Europe socialist is no longer a mere euphemism for their general fiscal ineptitude. The first time the Union got a financial test and it has failed miserably. It is already an inescapable fact that bailouts will mark the next half-decade of European economic policy and that is a conservative estimate.

The only question is will our friends across the pond learn from it or not?