As stocks sell off and sovereign debt ratings drop, people are starting to realize how tenuous this economic recovery is. Debt crises rarely occur in isolation; in fact, they are quite "contagious." When the debt crisis spreads to the U.S., you will see some real fireworks. From Bloomberg:
Portugal had its credit rating cut two steps by Standard & Poor’s as contagion from Greece’s debt crisis spreads through the euro region.Portugal may have the fourth highest deficit to GDP ratio in Europe, but it lags the U.S, whose deficit to GDP ratio sits at 9.9%. With government spending increasing at a torrid pace, we're well on pace to surpass 10% this year. Of course all the headlines are focused on the problems in Europe, which is quite comical if you ask me.
S&P lowered its long-term local and foreign currency ratings to A- from A+, it said in a statement today. The outlook is negative, the company said.
The extra yield investors demand to hold Portuguese bonds over German bunds surged to 265 basis points today, the most since at least 1997, as the government struggles to convince investors it can cut its budget deficit. Portugal, whose economy has barely grown for a decade, had a shortfall of 9.4 percent of gross domestic product last year, the fourth-highest in the euro-region.
Commodites are down across the board, including crude oil, which is down over 2% as we speak. But gold is mysteriously bucking the trend in commodities and is rising on the news of Portugal's debt downgrade.
Flight to quality, anyone?
This article has been republished from Moses Kim's blog, Expected Returns.