The Portuguese example: 7 days of Economics

The risk is well known: if Portugal’s sovereign debt is downgraded below investment grade by this last agency, it would no longer be eligible for the ECB’s regular refinancing operations, QE would have to be halted in this country and, most importantly, Portuguese banks would have to seek financing through the national central bank’s emergency liquidity assistance window. One cannot imagine a better way to reactivate the links between banking risks and sovereign risks, which the Banking Union is supposed to alleviate, one way and the other. At this stage, statu quo is still the most probable hypothesis based on the latest upward revisions and stable outlooks by all of the rating agencies, and the small but real improvements in the country’s economic and fiscal situation. Yet, in case of a bad outcome, it is important to note that adequate tools are in place. The European Stability Mechanism can offer the country a so-called “precautionary”programme, implying very light conditionality, which would allow Portuguese debt to benefit from a waiver and become eligible again for ECB operations. An emergency procedure even exists that would allow such a programme to be opened in record time, not taking into account though the political cost of such a decision, for Portugal, of course, but potentially for other countries as well. This brings us to the big question of whether it is acceptable that a rating agency’s decisionscan have such a big impact on the smooth functioning of the monetary system.