Portugal and Spanish banks downgraded

(25.03.2011) After the resignation of the Portuguese government, the government debt was downgraded by two rating agencies yesterday. The rating of many Spanish banks was also lowered. Nevertheless, the euro keeps up its strength vs the dollar. Today the ifo-index will attract attention.

By Knut A. Magnussen, Senior Economist at DNB Markets

DNB markets dealingroom in osloAfter the resignation of the Portuguese government on Wednesday, the likelihood that Portugal will become the third country to receive support from EU and IMF has increased. The Prime Minister Socrates resigned after failing to get support for new austerity measures from the Social Democrats. A new election will probably not be held until May or June.

With sky high government bond yields (to-years notes at 6.9% yesterday) and an imminent need for refinancing, is seems likely that the country will receive support from ESFS, maybe even before a new government is in place. The rating agencies Fitch and S&P downgraded Portugal by two notches to A- and BBB respectively. The country may need between 50 and 70 bill euro according to Bloomberg. By comparison: Greece received 110 bill. (85 bill from EU) and Ireland 85 bill. (45 bill from EU). At the EU summit yesterday EU-leaders agreed to increase the rescue fund to the original 440. bill euro in June.

Moody’s yesterday downgraded 30 of the smaller Spanish banks. Half of the banks were lowered by two notches, ten were lowered one notch and the remaining five were put down three or four notches. The move was a follow up of the downgrade of Spain (to Aa2) some two week’s ago. In addition the smaller banks are regarded as riskier as they are not any longer as critical as before. Hence they will probably receive less support from the government if needed. The rating to the three larger banks, Santander, BBVA and La Caixa, was not changed. However, Spanish banks are obviously still a major risk to the Spanish economy.

Nevertheless the euro strengthened vs the dollar yesterday. A reason may be that the macroeconomic data are still solid. The preliminary PMI-indices for March only fell marginally, lowered by the manufacturing sector. However, the level is still high (57.5) pointing at continued expansion of activity. Hence it still seems likely that the ECB will hike the repo rate at the upcoming rate meeting 7 April. This was also conformed by ECBs Jurgen Stark in an article in WSJ yesterday. Today the important German ifo index will be published. It is expected a small decline from a very high level. 

British retail sales fell in February. The 0.9% drop was somewhat stronger than forecasted and at the same time the increase in January was revised downwards. If the two months are seen together, there is a moderate increase in sales and the development is not that weak taking into consideration that the VAT was raised at the turn of the year. However, consumer confidence is weak, indicating sluggish demand going forward. If this turns out to be the case, it seems likely that Bank of England will wait longer than anticipated before hiking the bank rate. The minutes from the March meeting showed that the uncertainty at present is too large and is preventing a tightening of the monetary stance.     

US durable orders data disappointed somewhat in February. Total orders fell by almost 1%, while a similar increase was expected. Corrected for the volatile transport orders there was a drop of 0.6%. However, the drop in February should be seen as a reaction to a fairly strong growth in January. And the data for January were revised upwards. Hence the strong upward trend is still in place. Initial claims data were stable at around 380.000. The negative tendency for claims is still strong, pointing at a continued improvement of the US labour market. The payrolls data for March are due in a week’s time. The Fed yesterday announced that Bernanke will hold press conferences after 4 of the 8 annual FOMC meetings, ie at the two-day meetings in January, April, June and November. New forecasts will be presented by the Fed chairman at these meetings. For the other four meetings there will be no changes.