Portugal downgrade two notches and assigned negative outlook as Portugal will likely bailout banks and seek Brussels bailout

Moody's downgraded Portugal's long-term gov't bonds to A3 from A1 and assigned a negative outlook. We have said here that Portugal will be bailed out by the Brussels machine because the only other alternative is default, and for some reason, that is politically unpalatable for Germany and France.

Anyhow, the markets consider this bailout a done deal as it has near record CDS spreads (see below).

CDS spreads at 506.68
Moody's rating action was driven by the following four overriding problems.  Via Moody's
1. Subdued growth prospects and productivity gains over the near to medium term until structural reforms, especially in the labor market and the justice system, begin to bear fruit;
2. Implementation risks for the government's ambitious fiscal consolidation targets;
3. The government's balance sheet may need to expand further in the event it has to provide financial support to the banking sector and government-related institutions (GRIs), which are currently unable to access capital markets;

This is the big wildcard.  Ireland, before they took bank liabilities onto their sovereign balance sheet, were down but not out.  If Portugal does this, it is game over for Portugal.  They will be in worse shape than Greece.  As it is not certain that this possibility will play out, they still not in Greece territory.
4. Challenging market conditions that have led to increases in the government's financing costs, which, if sustained, will cause its debt affordability to weaken, particularly in the context of generally higher European interest rates. Accessing the European Financial Stability Facility may lead to a reduction in financing costs, but questions would remain as to when the government would be able to re-access the capital markets and on what terms.

The new measures in the recent update on the stability and growth programme announced by the Portuguese government figured prominently in the rating conclusion. Moody's expectation that the revenue increases, expenditure reductions, and structural reforms specified by the government will be achieved is a critical consideration underlying the A3 rating.

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