Portugal and Ireland were yesterday apparently locked in an unedifying and reluctant race towards bankruptcy, with renewed market pressures on both troubled economies building. The only good news to be extracted for the eurozone is that markets seem willing to allow Spain the benefit of the doubt; the usual Iberian contagion effect appears to have been contained, at least for now.
Credit ratings agency Standard & Poor's stripped Ireland of its lastremaining "A" credit rating in reaction to the news the Irish state would have to find a further €24bn (£21bn) to recapitalise its banks.
Still, the downgrade was less than analysts had feared, just as the €24bn was actually on the low end of expectations when it was announced by the Irish central bank on Thursday, after further "stress tests" revealed the fragility of Irish financial groups. The outlook is stable, S&P said in a statement, and the agency added that it expected the Irish economy would gradually recover after a three year contraction. Its reliance on external trade meant it had better prospects than Portugal and Greece.
Meanwhile, another agency, Fitch, warned that it could cut its BBB+ rating on the back of weaker economic growth in the former "Celtic Tiger", as well as the seemingly never-ending troubles afflicting its financial sector.
Fitch placed its long-term ratings for Ireland of BBB+ on negative, "indicating a heightened probability of a downgrade in the near term". S&P now rates Ireland BBB+, above Portugal and Greece, in line with Fitch. The other major agency, Moody's, rates Ireland Baa1, with a negative outlook.
Portugal managed to see an issue of one year government bonds away yesterday, but only by offering a yield of almost 6 per cent, with analysts wondering why the Lisbon government wouldn't prefer to take a longer loan at a cheaper rate from the IMF/eurozone bail-out fund, which many believe will soon prove inevitable.
The focus is now on Portugal'simmediate cash needs. The country faces two bond redemptions, on 15 April for €4.3bn, and then another repayment on 15 June of €4.9bn.
Lisbon has said that Portugal had sufficient reserves to cover both of these, but analysts at Capital Economics in London dispute this.
"It is hard to see how this can be the case," they said. "No public data is available regarding Portugal's cash reserves, but we can roughly estimate them."
Even more crucially, Portugal has only a caretaker government in place to weather the hurricane now ripping at her financial structure.
The president dissolved parliament on Thursday and set 5 June as election day, meaning the country will be in limbo until then.