Two more downgrades. Sovereign debt crisis continues.

First:

Hungary faces the risk of further downgrades of its credit rating after Fitch Thursday cut Hungary’s sovereign debt by one notch to BBB-.

The risk of a further downgrade of Hungary’s credit rating could increase in case of further intensification of the euro area crisis, said Citigroup economist Piotr Kalisz. Citi doesn’t expect a downgrade to non-investment grade in the near term, but markets could start pricing in such a risk especially if the government fails to present a credible fiscal adjustment plan.

Although the downgrade came as no surprise, the forint reacted by weakening to the euro. Fitch followed Moody’s Investors Service Inc. and Standard & Poor’s Corp. in putting Hungary’s rating to one grade above junk.

Second:

Fitch Ratings on Thursday downgraded Portugal’s credit rating to A+ from AA-. The agency also downgraded Portugal’s short-term currency rating to F1 from F1+. The Associated Press said that Fitch cited a slow reduction in Portugal’s deficit and a tougher financing environment as reasons for the downgrade. The euro bought $1.3098, an improvement from earlier in the U.S. session, and slightly up from late Wednesday.

Anybody think the sovereign debt crisis is over?

Advertisements

Irish Credit Rating Crashes

Just yesterday, somebody told me the Irish credit problem has been solved. With the market indexes trading at or near two-year highs, that would seem to be the case.

But then we get news that Moody’s cuts Irish credit rating by five notches:

Moody’s Investors Service said Friday it has cut its rating on Irish government bonds by five notches to Baa1 from Aa2. The credit rating agency said the outlook for the rating is negative. The downgrade comes after the agency said in November that the most likely outcome for Ireland’s credit rating was a multi-notch downgrade that would leave it within the investment-grade category. “Ireland’s sovereign creditworthiness has suffered from the repeated crystallization of bank related contingent liabilities on the government’s balance sheet,” said Dietmar Hornung, lead analyst for Ireland. As well as the cost of supporting the banking sector, Moody’s said the increased uncertainty over the country’s economic outlook and the decline in the Irish government’s financial strength contributed to the downgrade.

OUCH! Ireland’s credit rating drops 5 notches and the outlook is still negative, which means Moody’s could downgrade it even further.

The sovereign debt crisis is far from over.

Are individual states following Europe down into the debt crisis?

While the United States appears to be safe from the sovereign debt crisis hitting Europe, at least for now, individual states may be following Europe down the hole. In fact, some states may even be leading the way. According to Bloomberg:

Illinois capital-markets director John Sinsheimer and Citigroup Inc. bankers took a globe-girdling trip from the U.K. to China in June to persuade investors that the state’s $900 million of Build America Bonds were a bargain.

The seven-country visit worked. The state sold one-fifth of the federally subsidized securities abroad the next month, tapping investors who are the fastest-growing source of borrowed cash for U.S. municipalities. Illinois, with the lowest credit rating of any state from Moody’s Investors Service, dangled yields higher than Mexico, which defaulted on debt in 1982, and Portugal, which costs more to insure against missed payments.

Somehow, I didn’t see this story on the front page of the newspaper or on the evening news. As the whole world focuses “basket-case” countries like Portugal and Mexico, some of our own states have lower credit ratings and are paying higher interest rates as a result. Illinois is, of course, much smaller than Mexico but it’s about the same size as Portugal. The two are actually quite similar from a political-economic standpoint. Illinois is part of a larger union, the United States, while Portugal is part of the European Union. Neither controls is own currency and neither can devalue its currency to forestall default. It remains to be seen if the EU would bail out Portugal were it to face default and it also remains to be seen if the US would bail out Illinois or other states were it to be in the same situation.

I am not yet proposing that Illinois is as much of a risk to the global financial system as Portugal. But rating agencies and investors already see Illinois as more likely to default on its debt. Yet the media and politicians are covering up this story, pretending that things are good here in the US when they are far from.