Portugal

Moody's Investors Service warned it may lower Portugal's credit rating by as much as two notches, dealing another blow to investor confidence in the euro zone, the Wall Street Journal reported today. Moody's warning came less than a week after the ratings agency said that it may downgrade its ratings on Spanish government debt. In putting Portugal's A1 long term and Prime-1 short-term government bond ratings on review, Moody's cited uncertainties over the longer-term health of Portugal's economy, which could suffer from the government's fiscal austerity plans.

As Dublin moves begrudgingly toward accepting a European Union bailout, attention is rapidly shifting to Portugal, the country perceived to be as weak a link in the euro zone as Ireland, though for different reasons, the International Herald Tribune reported. While Portugal’s leaders, like Ireland’s, insist that they have enough money for now and are making brave and necessary cuts to government spending, in fact the Portuguese government is both divided and stalemated.

Concerns over the financial stability of countries on the euro-zone's fringe mounted Monday as one of Ireland's largest banks had its credit rating cut and political tensions fueled doubts about Portugal's deficit-cutting plans, The Wall Street Journal reported. Moody's Investors Service downgraded the senior debt of Anglo Irish Bank Corp. by three notches to Baa3. Ireland's property-market collapse has crippled its banks, and the government has so far spent €33 billion ($44.5 billion), about one-fifth of its gross domestic product, rescuing them.

Indebted European countries from Greece and Italy to Spain have in recent weeks set off down a common path toward fiscal recovery, promising to slash spending and raise taxes. One sobering scenario of what they may be up against comes from Europe's southwestern edge: Portugal, which embarked a decade ago on a similar journey of austerity, higher taxes and intermittent spending cuts, is still cutting—and still struggling, The Wall Street Journal reported.

Harvard University Professor Martin Feldstein said Greece will eventually default on its bonds and other euro-area nations may follow, most probably Portugal. “Greece is going to default despite all the talk, despite the liquidity package,” Feldstein, who warned almost two decades ago that the euro would prove an “economic liability,” said in an interview with Tom Keene on Bloomberg Radio yesterday.

Europe's hopes of containing Greece's credit crisis dimmed as the country's debt woes spread to Portugal, sparking a selloff in markets across the globe and testing the European Union's ability to protect its common currency, The Wall Street Journal reported. The euro tumbled to its lowest point in a year against the dollar after Standard & Poor's Ratings Services cut Portugal's credit rating two notches and downgraded Greece's debt to "junk" territory, a first for a euro-zone member. The move is bound to worsen Greece's already dire fiscal situation and hamper a recovery.

The euro zone's decision to include the International Monetary Fund in any Greek rescue plan extends the Fund's influence to a large swath of the world economy—and gives a political boost to its managing director, The Wall Street Journal reported. Over the past two years, the IMF has worked with the European Union to bail out EU members, including Latvia and Hungary. Now it is clear that the IMF mandate reaches also to Portugal, Spain and other troubled members of the 16-nation euro zone, said Domenico Lombardi, a Brookings Institution expert on the IMF.

European Union leaders hold what is likely to be a tense and difficult summit on Thursday, divided over how to help heavily indebted Greece and struggling to maintain confidence in the euro, Reuters reported. Diplomatic efforts on the eve of the two-day summit failed to bridge differences over whether to offer a safety net to Greece, helping push the euro down to a 10-month low after Portugal suffered a debt down downgrade.

EU Commission chief José Manuel Barroso has said the union’s executive would be able to give special fiscal support to Greece without breaching the “no bailout” rule that prohibits overdraft facilities for distressed governments, The Irish Times reported. Mr Barroso also said the commission would examine closely the relevance of banning “purely speculative naked sales” of insurance against the risk of sovereign default, a market widely held to have intensified pressure on Greece amid anxiety about its budget deficit.

France has proven surprisingly stable in the European economic storm. As Greece struggles to avoid default or bailout, Spain and Portugal watch anxiously, Sweden falls back into recession, Germany argues about historically high budget deficits and Britain grapples with deficits and debt of Hellenic proportions, France looks solid and even wise to many, The New York Times reported.