Brussels, 06/07/2011 (Agence Europe) - The European Commission, on Wednesday 6 July, was highly critical of the downgrading of the rating of the Portuguese sovereign debt by American ratings agency Moody's, which made Portugal the second country, after Greece, to be placed in the “junk” category. European Commission President José Manuel Durão Barroso “deeply regrets” the timing and the “magnitude” of the decision. “Portugal has just started to implement a medium-term adjustment programme” negotiated with the troika (Commission, ECB and IMF) and backed by all the countries of the eurozone, he added, wondering what could justify such a move “in the absence of new facts on the Portuguese economy”. Portuguese Prime Minister Pedro Passos Coelho described the downgrading of the Portuguese rating, which will make refinancing operations by the country's businesses more expensive, as a “punch in the stomach”, the Lusa agency reports.
The spokesman for Economic and Monetary Affairs Commissioner Ollie Rehn spoke of a feeling of déjà vu in the downgrading of Portugal's rating, referring to the tribulations suffered by Athens. He said: “This unfortunate episode once again raises the question of the behaviour of rating agencies and their supposed ability to see into the future”. He pointed out that the new Portuguese government, in place since the end of June, is only beginning to apply the austerity programme agreed in exchange for international aid of €78 billion (see EUROPE 10380). The troika's first follow-up is scheduled only for the end of August. And the government will go even further than the terms of the programme approved, in particular on privatisation.
Moody's believes that Portugal will not meet its medium-term budgetary commitment (to reduce the public deficit of 5.9% of GDP in 2011 and bring it below 3% by 2013). If this were to happen, Portugal would have to seek a second rescue, which would involve the private sector, similar to the one Greece is currently negotiating with its partners.
While new French Finance Minister François Baroin restricted himself to expressing his confidence in the Portuguese authorities, Germany added its voice to that of the Commission on Wednesday. Finance Minister Wolfgang Schäuble said that the ratings agency oligopoly had to be broken and their influence limited. The previous day, German Chancellor Angela Merkel had warned that the countries of the euro area would not allow themselves to lose their independence of judgment, following the statement by American ratings agency Standard and Poor's that the French proposals on the contribution of the private sector in the second Greek aid plan would probably lead the country to default (see EUROPE 10411). On Wednesday, the Institute of International Finance (IIF) met to take this issue forward.
Legislative initiative in November. The Commission is drafting a new legislative initiative to strengthen the regulation of ratings agencies established in the EU. Developments seen since the start of the sovereign debt crisis make it clear that EU rules have to be reviewed and strengthened, Barroso said. Being considered are prevention of possible conflicts of interest resulting from the issuer pays model that ratings agencies operate, improvement of the methodology and the transparency of sovereign debt ratings, and increasing competition on an oligopolistic market dominated by three companies (Moody's, S&P, and Fitch). Barroso says that any decision on the creation of a European ratings agency was up to the markets, though saying it was “strange” that no such agencies exist in Europe. The Commission proposal, expected in November, will remove references to ratings agencies in European financial legislation. Commissioner Michel Barnier, who is in charge of this issue, is sympathetic to the suspension of the ratings of countries which are being bailed out, a suggestion put by former French Finance Minister Christine Lagarde. (M.B./transl.rt)