by Soner Kristak
March 29, 2011
Recently, there was an announcement of two important pieces of news flows from S&P: a) Downgrade of Portugal’s credit rating to BBB- ;b) downgrade of Greece’s rating to BB-. S&P statement expressed the rating agency’s concern on Greece. They said that the country might need to restructure, and existing bondholders might lose out. According to the decisions taken by the EU leaders’ meeting on March 25 , the repayment of loans granted to Greece through European Stability Mechanism would take priority. Similarly, Portugal’s rating by S&P was reduced behind the country’s weakened capital market access, and its likely considerable external financing needs in the next few years.
There is no doubt that there are good justifications for the downgrades by the credit rating agencies. However, the current situation is a result of a process that has been shaping in the last 10 years with the introduction of Euro. While the introduction of the common currency can be best described as a success, the whole system has inherent flaws which are likely to create issues in the future.