Eurozone: The Portuguese Rating Is Improving

The Italian rating has again been downgraded; however, Portugal and Ireland are moving out of the woods. The Eurozone stays under pressure in the short-term but the euro is likely to test the high against the dollar by the end of 2013.

US labour is improving

World markets are slowly building momentum as the worst of the financial crisis is left behind. The US dollar should keep on rising in the short term, considering the incertitude in Italy and the United States. However, markets should expand in the final part of the year. In the United States, the unemployment rate is declining and should support consumption. In February, 236,000 new positions were created, supported mainly by the private sector. The unemployment rate is now at 7.7% and will move closer to 7.0% by the end of 2013. Labour participation fell to 63.5%, while the average hourly earnings rose 2.1% year-on-year and weekly hours worked increased to 34.5 from January’s 34.4. The labor market, along with the fiscal policy, is under the close scrutiny of the Feds. Mrs. Janet Yellen, a candidate to succeed Mr. Bernanke, explained that the hiring rate and the job-quitting rate are two other factors to watch, with both only few notches away the pre-recession levels. The Federal Reserve should keep the monetary policy unchanged this year, but pressure may increase to tighten it sooner than expected.

Italy downgraded, Portugal promoted

Following the elections, Fitch downgraded the Italian rating to BBB+. ECB president Mario Draghi said the country is in much better shape now than it was two years ago. The improvement in the fiscal situation has been tangible, and the country can now work on structural reforms. Actual incertitude should only be short-term and should not spread to other European countries such as Spain. Last week the ECB left interest rates unchanged, but it did not deny the possibility of cutting them later on if growth does not pick up. Rating agencies are embracing the fact that Portugal and Ireland will probably be given more time to repay their European loans of €52 billion and €40 billion. In fact, the eurozone finance ministers have reached a compromise, and it is now up the Troika to introduce a solution so that Portugal and Ireland can return to the markets by mid-2014. The S&P agency has increased the outlook rating for the Portuguese debt from negative to stable, and yields are now below the benchmark of 6% for the first time since September 2010. The country is not out of trouble yet— unemployment is almost 20%—but another step in the right direction has been taken.

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