Europe news. EU leaders, jointly with IMF, have hardly managed to withhold Greece on its steady way to default that there has come a new trouble; moreover, from the place, where it was not expected. The second (according to the degree of the problem) “ailing economy” of Europe – Portugal became evident. Although the country’s new leaders assures investors upon oath that national economy is not so bad, on July 5 international rating agency Moody's Investors Service lowered the long-term rating of Portuguese government bonds from Baa1 (moderate credit risk) to Ba2 with a negative forecast.
Who gives assessments to economies?
International rating agency Moody’s Investors Service (subsidiary company of Moody’s Corporation) specializes in research, analysis, and assessment of risks at investment market. The agency employs about 4,500 experts, who prepare credit ratings:
- this April the agency has already lowered the rating of Portugal ;
- credit ratings are prepared by specialists on the basis of analyzing such factors as the country’s national debt as well as stability of its financial system and credit institutes;
- as a rule, such ratings serve as one of the main sources of information for traders, who deal with trade operations with sovereign bonds.
Why did the rating of Portugal become “trash”?
The experts of Investment Department of Forex Academy and Masterforex-V exchange trade explained that Portuguese government bonds, according to their investment level, have currently lowered to speculative securities:
• comparison of government bonds’ prices. Government bonds of Egypt have approximately the same rating, but after all Portugal belongs to euro zone, which, unquestionably, imposes certain obligations on it;
• rating of Moody's. Moody's Agency has also lowered a short-term credit rating of Portuguese government from Prime-2 to Not-Prime. This means that the country’s leaders used to be assessed as such that shows a possibility to redeem its short-term debenture; however, its current rating cannot be applied to any investment category;
• lowering Portuguese rating. Portuguese reputation has been hit not only by Moody's Investors Service. Beside it, two other agencies, Standard&Poor’s and Fitch, have also lowered this country’s rating to BBB level; in other words, to almost the bottom line of investment range.
• comparison with Greece. Portuguese rating is yet higher than the Greek one, which is at the lowest level, Caa1.
What are the reasons of Portuguese rating crash?
The experts of Masterforex-V Academy outline a number of main reasons of the considerable fall of the country’s economic ratings:
1. Agency’s official position. Portugal , according to experts of Moody's Investors Service, is likely to need new financial aid in the nearest future. In such a case the burden of paying out Portuguese debt by installments will also settle on the country’s government bonds’ holders. In a word, the recent example of Greece cannot be of no trouble for investors.
2. Scepsis in relation to the possibilities of new government. All efforts on budget normalization, put by the recently elected country’s leaders, are assessed by the rating agency as insufficient. Moody's has serious doubts that the premier Pedro Passos Coelho and his team will manage to reduce the budget deficit from 9.1% in 2010 to 3% up to 2013 as well as stabilize the size of enormous state debt.
3. Bad expectations. Specialists of Moody's Investors Service realize that Portuguese condition is better than that of Greece. They simply predict that the concern of private investors-Greek government bonds’ holders will certainly affect the attitude towards Portuguese securities.
Reaction of Portuguese side
Portuguese Ministry of Finances does not agree with Moody's. The country’s government has immediately, but temperately, reacted to the announcements of credit rating fall. The head of the Ministry of Finances claimed that the rating agency had not in any way considered the last measures taken by the government for a quicker reduction of budget deficit:
• Portuguese pretensions to agencies. Let us remind that not long ago Portuguese procuracy has already initiated investigation in relation to three agencies: Moody's, Standard & Poors, and Fitch. The reason for this became a previous (spring) lowering of the country’s rating.
• Lisbon promises. As soon as the new rating was issued, Portuguese government expressed certainty that “strong macroeconomic corrections are the only means to increase quotes and to regain investor’s trust to the country”.
• Success in economy. After old taxes were increased and a number of new ones introduced, Portuguese government managed to considerably (up to 5.9% from GDP) reduce the national debt.
• Consolation from Moody's. The rating agency has promised to increase Portuguese rating already in autumn if the tendency towards reduction of the budget remains. Therefore, relations between international rating agencies and the government of this small European country remind armed neutrality: both parties are pointedly preventive to one another, but at the same time know how to hit their enemy harder.
What is the markets’ reaction to news about Portugal ?
Markets have immediately reacted to the claims of agencies’ representatives:
1. Surprise effect. Although many were expecting something similar to happen, less than a week has passed since rage concerning Greece started to cool down. Therefore, this moderately negative for EU information was rather vividly reacted to by the markets.
2. Fear of chain reaction. Another negative piece of news from Europe has lead to the drop of EUR/USD currency pair to the mark lower than 1.44. However, experts believe that this is for a very short period.
What Euro rate shall be expected in the nearest future? Analytics of the Department of Mid-Term Trade and GOST Patterns of Forex Academy and Masterforex-V exchange trade explained the development of the situation in the following way:
Grading the variants of movement. Monthly-Daily-H1. EUR index. June 08.
1. Variant Daily UP - (Kt-1) (Kt-2) - (Kt-3)
Level of support: 2.2755 is critical for this variant of movement and cancels such variant of grading.
Levels of resistance:
Volatility index Saks Channel - Н1: 2.3006 – 2.3023(D1) - 2.3078 - 2.3112(MN1) - 2.3145(W1).
Local maximum: 2.3208. Target Buy-network of basic index: 2.3078 - 2.3144.
2. Variant Daily. FLAT - Flat-zone
Level of resistance: 2.3208.
Level of support: 2.2755.
When the side movement is formed, these levels are critical. When extension models are formed, false breaking Flat-zone levels of support and levels of resistance is likely; however, the maximum movement can amount to more than 161.8% - 2.2475. Therefore, in this case price cannot be beyond the scope of Buy-zone and Sell-zone. 161.8% level of support within Buy-zone and 161.8% level of resistance within Sell-zone are critical for this variant of movement and cancel such variant of grading. Variant Flat is not considered if these levels are broken.
3. Variant Daily Down - (Kt-1) ...
Level of resistance: 2.3208 is critical and cancels such variant of grading.
Levels of support:
Volatility index Saks Channel - Н1: 2.2862 - 2.2787.
Local minimum: 2.2797. Target Sell-network of basic index: 2.2862 - 2.2755.
Analytics and automatic wave grading of the Department of Mid-Term Trade and GOST Patterns of Masterforex-V Academy.
Euro index:
Whose turn is next?
Judging from the forecasts of the same rating agencies, there is high likelihood of default yet happening in such countries:
In Europe – Ireland, Spain , Italy, Hungary.
Outside its borders – Turkey, Argentine, Egypt, Venezuela.
The Editorial Board of “Market Leader” magazine, jointly with experts of Masterforex-V Academy, holds a questionnaire in investors’ and traders’forum: in your opinion, shall international rating agencies be trusted?
• yes, they are always thoroughly monitoring the situation;
• no, they pursue their goals and bear no responsibility for the results;
• partially, the main trends are marked correctly.
