Portugal

Portugal’s budget deficit is lower than in most other euro-zone economies. Since the start of the euro in 1999 it has been among the slower-growing economies in the club, despite being its poorest member. The result of this effect is that Portugal’s bond yields have soared higher than at any time since they join the euro.

Portugal will be the third peripheral euro-zone country to need a bail-out. It need and ambitious reform to result the deep-seated structure problems that have at the moment.   The country need to issue debt is only €2 billion or so a month. Although that is small by most measures, and the government may have enough cash to meet redemptions in April, Portugal could struggle to last until June. The markets are expecting action long before then. In mid-March Moody’s, a rating agency, downgraded Portuguese debt.

Portugal’s political turmoil and its urgent need for a rescue will now loom large at an EU summit this week, which may put off a deal to expand the bail-out fund and fail to sign a new “pact for the euro”. If EU leaders have to bail out Portugal, they may find they have already used quite a big chunk of their fund. The markets will swiftly move on to attack the Spanish. The bail-out fund can quite easily finance Portugal. It is not clear that it could deal with Spain.

Moody's view in Spain

The Spanish banking sector was qualified by Moody's Investors Service Inc. The result was not good enough and in addition the pressures exist in Iberian banks following the collapse of Portugal’s minority government overnight.

The crisis in Portugal, which is widely seen on the brink of requesting a European Union bailout, may also have a limited effect on Spanish banks. According to estimates from the Bank of International Settlements, Spanish banks are the most exposed to possible losses in Portugal, as they account for $109 billion out of $322 billion in total exposure of foreign banks in the country.

In relation with the result, the downgrade comes for the Spain’s sovereign debt and all the weak banks. It also reflects the expectation of a weaker support environment for banks across Europe.

The report has further added 30 banks, to make a thorough decision on their ratings. Moody’s downgraded Spain’s sovereign rating one level on March 10 to Aa2 while warning of further downgrades on the likelihood the country’s bank restructuring efforts will cost double its 20-billion euro forecast. The ratings of the country’s three largest banks - Banco Santander, BBVA and La Caixa - were not affected by the action.

European stocks closed higher the day that the report was published. Britain's FTSE 100 added 1.5%, the DAX in Germany gained 1.9% and France's CAC 40 rose 1.4%.