The Self-Fulfilling Prophecy

First, a disclaimer: this post is mainly political and discusses the Portuguese and European economy, so if you’re not into that, feel free to skip ahead.

Yesterday, the Moody’s rating agency slashed the Portuguese rating by four points, leaving it at a “junk” level. It’s been a month since we had general elections and everyone is on board with the slashes and tax hikes the new government approved. For those of you unaware, the IMF is controlling Portugal’s finances and these new measures go beyond what the IMF demanded. So why the slashing? Everyone is baffled.

In the movie “Inside Job” there’s a part where we see the people responsible for these rating agencies (that I should remind you rated triple A a lot of American Banks just before they collapsed) excusing themselves by saying that they’re just opinion makers, that people are free to follow their advice or not. So, they’re not accountable. No one is. Once the US deregulated their banking industry, that led to the Credit crisis, the world has been facing economic hardship, but they were still left free to wreak havoc on international markets.

When the lucrative Credit Default Swap market collapsed, they were left looking for the next cash cow. And they turned their guns to Europe. A few European countries that were struggling to develop themselves into the general european level (often called the derogatory term PIIGS) were building infrastructure for the past 2 decades to prop themselves with the aid of their other European partners. Almost all of them had high stakes in state owned companies in Telcos and Utilities. They were fragile economics facing slow growth or growing on real estate alone so they were easy prey. Then the slashing began. They were barely making by, so a huge increase in lending rates, led them into red.

Now, these rating agencies are owned by investment banks. These investment banks advised some of their clients to buy into European debt. After all, it’s a huge return and the EU would surely help these failing countries to keep the Euro alive. And what happens when they’re out of the private lending market? They are forced to sell state owned companies at fire sale levels. And who will buy lots of stock? Those investment banks’ clients.

The only way out for Europe to stand its ground is to move tightly together into a Federalist state. A common currency, a common budget, a common fiscal policy. It’s now or never.