Portugal is not Greece. Its debts as a proportion of national output are smaller. It has a stable Government committed to pushing through austerity measures. It didn’t fiddle its figures to get into the euro in the first place. And a comparatively high proportion of its people routinely pay their taxes.
But it nevertheless may need a second bailout package on top of the €78 billion already agreed from the EU and IMF. To pretend otherwise is silly. The bile heaped on Moody’s for saying this and for its four-notch downgrade on Tuesday night looks counterproductive. José Manuel Barroso, the European Commission president, and Michel Barnier, the regulation chief, are doing their cause no good by threatening to shoot the messenger.
The problem is not Moody’s and the other credit rating agencies, however poor their track records. It is the regulators who have set the rules of the financial system so that the agencies’ judgments carry so much weight.
It is preposterous that the outcome of the French-backed rollover proposal for Greece could be determined, not by central bankers or even politicians, but at the whim of a bunch of discredited credit scorers.
Investment institutions have also allowed their destinies to be far too influenced by these agencies. Many are boxed in by rules forcing them to automatically dump securities the minute they are downgraded from investment grade to junk.
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It is time for both regulators and investors to release themselves from this self-imposed tyranny. The agencies are, after all, hopelessly conflicted, their fees paid by the very borrowers whose creditworthiness they are supposed to be assessing.
Portugal’s challenge is to prove Moody’s wrong, not by sulks and threats, but by bringing in austerity measures as quickly as possible. It has a mountain to climb in cutting new borrowing from 9.1 per cent of GDP to 3 per cent in the space of four years.
At least one indicator is moving in the right direction. Portuguese savers are actually adding to their bank deposits there, not worried that the country might pull out of the euro and devalue their balances.
The same cannot be said for either Greece or Ireland, where savings have been withdrawn in significant quantities, according to European Central Bank data.
It’s not clear whether this is to shift it into bank accounts in more solid eurozone jurisdictions, or to stock up on gold and tinned food, or merely to pay the bills. Any which way, it’s not a promising sign.
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A home truth for new buyers
Housing-market armageddon is postponed. Again. Prices perked up in June, according to the Halifax. The price of its standardised house rose by 1.2 per cent to £163,049. The smoothed quarter- on-quarter trend is fractionally downwards, but prices for the most part have been going sideways for the best part of a year now.
The flat nationwide figures conceal larger regional variations, of course, with a strong market in London and many parts of the South offsetting falling prices in the North and Northern Ireland. But the worst fears of sellers, and the best hopes of buyers, have not come about. A significant second downturn in prices — predicted by many — has not materialised.
Mortgages for those with little or no deposit are as rare as cheap Georgian rectories with half an acre and a good local school. Millions of would-be buyers just cannot afford a home at current prices. Yet prices remain stubbornly elevated.
It’s hard to see that changing. With rents rising, property continues to be an attractive investment for the well-off. In this thin market it only takes a few cash buyers tempted by a decent rental yield to put a solid floor under prices.
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Are shares at rock bottom?
Here’s an intriguing factoid, courtesy of the equity analysts at HSBC. Shares are so cheap that they have been better value only 4 per cent of the time since 1988. The value of companies in the MSCI global index is languishing at just 11.4 times their forecast profits this year. By historic standards, this is the bargain basement. The average price/earnings ratio over the past 23 years has been 16.2.
Only very occasionally has this measure of value been more favourable: in the immediate aftermath of the Lehman collapse in late 2008, the figure got down to 8.7.
The same is true of British shares. Companies in the FTSE 100 trade on just 9.4 times their expected profits. The average since 1988 has been 14.1. Only 9 per cent of the time have UK blue chips been cheaper than today.
Across different sectors, valuations are even more extreme. Technology stocks have been this cheap only 1 per cent of the time, according to HSBC.
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Tell this to the big investment institutions and they will shrug and say that just because shares look cheap doesn’t mean they can’t get a whole lot cheaper. The eurozone crisis is just one of several shocks that could tip the world back into recession and financial markets into a complete funk again. A hard landing in China or a botched handling of Uncle Sam’s borrowing ceiling on August 2 are two others.
But if this nervous spell turns out to be no more than a soggy interlude in a more sustained recovery, then anyone brave enough to pile into equities now will do very well.
An uncommon change of pace
Many an investment banker gets the feeling sometimes, especially when the phone goes quiet. Wouldn’t it be a good idea to jack it all in and do a proper job? For most the feeling goes away again, not least because of the requirement to take a substantial pay cut. But not, apparently, for Simon Borrows, the veteran dealmaker at Barings and then Greenhill, who has quit to go and work for his old client 3i as chief investment officer. The theories are legion. Is he on a promise to take over from Michael Queen as chief executive? Is he there to help to spearhead a management buyout bid? Or does he feel the need for a spell of executive experience before clinching a plum chairmanship somewhere else? Time will tell.