Of Rules, Rubes, and Rubicons

Yesterday Moody’s downgraded some European debt. Does anybody care?

On the face of it, a lot of investors care. Yields on 5-year Portuguese bonds rose 2.8%. Some folks think it’s because this change has made a lot of people care who would rather be spending time on the beach, but the reality is a little more messy.

Portuguese bonds are still rated investment grade by S&P and Fitch, although they are watch-listed for a downgrade by Fitch. There’s no forced selling —yet. The downgrade wasn’t surprising, although the severity was. Before yesterday the bonds were Baa1; Moody’s downgraded them to Ba2: four notches. And in their comments they said the jury is still out on Portugal. In spite of a severe austerity plan that has been supported by the newly sworn-in government, Moody’s wants to get in front of this one, in spite of the tough plan the Portuguese just put in place.

So Portuguese debt is being repriced on bond desks across Europe because the suits at Moody’s finally decided to get tough. But if the other ratings agencies follow along—and they almost have to, now—what will happen? Auditors under orders following simple checklists will force banks to take capital charges and sell into a weak market regardless of the economics. The one-way market (down) makes things worse, at least in the short term. This always happens when there’s a significant downgrade.

But just because Moody’s says something doesn’t make it so. The viability of Portugal depends on the Portuguese. That doesn’t make Moody’s wrong—but they’re no Rubicon.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net
By | 2017-07-17T12:35:04+00:00 July 7th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

Leave A Comment