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Why Portugal faces death by a thousand downgrades

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Moody's hits Portugal Portuguese officials seem to be the only ones left who don't think they need a bailout.

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Moody's today downgraded Portugal's credit ratings again, citing the country's political uncertainty and questioning whether it can get its fiscal act in gear given pending elections. It's the second time in less than a month for Moody's.

"Moody's downgraded Portugal's sovereign bond rating by a notch to Baa1, warning that the country may have to seek outside assistance," said economists Gorica Djeric and Derek Holt of Scotia Capital.

"The report indicated that the decision was 'driven primarily by increased political, budgetary and economic uncertainty, which increase the risk that the government will be unable to achieve ambitious deficit reduction targets' through 2014. The European Commission has denied that it is in talks with Portugal over a possible loan. After closing at 8.591 per cent, Portugal's 10-year government bond yield now sits at 8.764 per cent."

Markets increasingly believe that Portugal will follow Greece and Ireland in seeking a bailout, despite the fact that everyone doth protest too much.

"We have said it before and we will now say it again: Portugal is headed for a default on its sovereign debt, possibly as soon as April 15, and surely by June 15," said Carl Weinberg, chief economist at High Frequency Economics.

"We see no policy mechanism in place that can prevent that from happening. The government has a €4.5-billion bond maturing in 10 days, and we figure it has less than €5-billion in cash on hand."

Mr. Weinberg also painted a dire scenario:

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"We also see no plan in place at the ECB or the EU to manage a Portuguese default. That is to say that a sea captain usually organizes the life boats and emergency supplies on deck if he sees his ship is sinking. We know of no contingency plan to prevent a Portuguese default from exploding into a euro zone banking and financial crisis."

Canada to lead G7: OECD A new forecast from the OECD projects Canada will lead the G7 in economic growth in the first half of the year.

Indeed, in the first quarter, the Organization for Economic Co-Operation and Development said today, Canada's economy is expected to have powered ahead of the others, with annualized growth of 5.2 per cent, well above the U.S. at 3.1 per cent, Germany at 3.7 per cent, France and 3.4 per cent, Italy at 1.1 per cent, and Britain at 3 per cent.

The OECD excluded Japan because of the devastation from the earthquake, tsunami and nuclear crisis.

Other economists have projected first-quarter growth in Canada in the range of 4 per cent to 4.5 per cent.

For the second quarter, the OECD sees Canada's economy growing by 3.8 per cent, again surpassing the U.S. at 3.4 per cent, Germany at 2.3 per cent, France at 2.8 per cent, Italy at 1.3 per cent, and Britain at 1 per cent.

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Over all, the OECD said, growth in the G7 countries, again not including Japan, appears to be stronger than previously forecast. But, it warned, inflationary pressures are creeping up, and unemployment remains "problematic."

"The outlook for growth today looks significantly better than it looked a few months back," the OECD's chief economist, Pier Carlo Padoan, said in a statement.

"Growth perspectives are higher all across the OECD area, and the recovery is becoming self-sustained, which means there will be less need for fiscal or monetary policy support."

China hikes rates Stepping up its inflation fight, China's central bank hiked interest rates again today by one-quarter of a percentage point. It's the fourth time since last fall the People's Bank of China has made such a move.

Mark Williams, senior China economist at Capital Economics in London, said the rate hike wasn't "entirely unexpected," but the timing was a surprise given more "dovish" comments from senior officials recently.

"The announcement may cause jitters about the impact tightening will have on Chinese growth," Mr. Williams said.

"However these should not be overplayed. The latest increases of 25 basis points for one-year deposits and loans are in line with the gradual policy tightening that has been under way over the last few months and will not do much to slow the economy. The benchmark one-year lending rate now stands at 6.31 per cent, still low relative to the pace of economic growth. The constraint on credit growth is the amount that banks can lend rather than the rates they charge."

Separately today, Australia held its key rate steady. On Thursday, the European Central Bank is widely expected to hike its benchmark rate by one-quarter of a percentage point.

The Apple effect Remember when Nortel Networks used to skew Canada's benchmark stock index because of its hefty rating? Well, Nasdaq said today it plans to rebalance the weighting of Apple Inc. , a move that pushed down its shares.

As of May 2, Apple's weighting will fall to 12.33 per cent from 20.49 per cent, Nasdaq said of the technology giant, known for its computers and its iPod, iPhone, iPad and iTunes.

According to Bloomberg News, Apple's weighting puts it more than six times ahead of Microsoft Corp. , though its market value is just 46 per cent more.

Apple's shares have been on a stunning rise over the past couple of years. Today's move, said The Wall Street Journal, could prompt marked pressure on Apple stock from money managers who track Nasdaq.

Teachers posts record investment income The Ontario Teachers' Pension Plan earned the most investment income in its history in 2010, but continues to struggle with a large funding shortfall, The Globe and Mail's Tara Perkins reports today.

The plan, which looks after the pensions of 289,000 active and retired Teachers, earned $13.3-billion in investment income in 2010, amounting to a 14.3 per cent rate of return. But its funding deficit grew from $17.1-billion to $17.2-billion, as teachers (along with the general population) are living longer, retirement periods are longer, and as low interest rates take their toll.

Telus launches all-you-can-talk Telus Corp. has joined its incumbent telecom cohorts by launching an unlimited all-you-can-talk cellphone service as new competitors continue to crowd the Canadian wireless sector, Globe and Mail telecom writer Iain Marlow reports today.

The Vancouver-based service provider has revived the moribund Clearnet brand and launched it as an unlimited talk-and-text plan in Alberta and British Columbia, its home turf. Clearnet is the name of the wireless upstart that Telus bought for $6.6-billion back in 2000, catapulting the regional phone company into a national wireless player.

Australia to reject exchange deal TMX Group Inc. and London Stock Exchange Group PLC take note: Australia is set to reject the planned takeover of its stock exchange by the Singapore exchange group.

While no final decision has been made, Australia's government today effectively signalled the death of the $7.8-billion (U.S.) takeover of ASX Ltd. by Singapore Exchange Ltd.

Australia's Treasurer Wayne Swan said the country's foreign investment review board has "serious concerns" about the deal and "subject to further consideration, I intended to accept the unanimous FIRB advice that the takeover would not be in the national interest," Reuters reports.

The operators of the Toronto Stock Exchange and the London exchange also face pressure as politicians and regulators weigh the deal. Ontario, in particular, has flagged concerns, though TMX officials continue to stress that it's in the country's best interests.

Scotiabank says it will meet targets The chief executive officer of Bank of Nova Scotia says the bank will meets its profit target this year.

The bank is aiming for profit growth of between 7 per cent and 12 per cent, and, Rick Waugh told Bloomberg News, "we set our targets in growth; the first quarter certainly achieved that, and I'm pretty comfortable that we're going to be able to continue."

Ties that bind A casual observer from outside Canada might be forgiven for wondering who the business types are among the national party leaders while trolling through their websites, and why the guy from the NDP is the only one wearing a necktie.

On the Conservative Party website home page, Stephen Harper is seen several times in a jacket but sans tie.

On the Liberal site, Michael Ignatieff is also without a tie (and you can download a high res version of the picture).

But on the NDP site, Jack Layton looks oh so corporate in either a purple or gold tie. (There's also a hamster on a wheel, but you've got to watch a video to find out why.)

Gilles Duceppe of the Bloc is also wearing a tie on his site, while Elizabeth May is pictured on the Green Party's site with all the party leaders, all the others men and all sporting a necktie. She, of course, is not.

This isn't an endorsement of any party leader. Or of neckties, for that matter. I just found it interesting as I looked at the sites, and wondered why the men dressed the way they do.

On his site, Mr. Harper looks like he's heading for a Sunday business brunch, while Mr. Ignatieff, in a traditional politician's uniform, looks like he's ready to get down to it. Or, for all the world, like he wants to be your friend. Or your therapist. Mr. Layton looks, well, like he's ready to chair the meeting.

In Economy Lab today

Frances Woolley: Scorecasting is the latest book to use the Freakonomics recipe for publishing success: take one University of Chicago economist, one journalist, and use economics to prove that conventional wisdom is wrong.

Here's Canada's contribution to last month's effort by the Group of Seven nations to weaken the yen: The equivalent of $124-million (U.S.). Kevin Carmichael reports.

In Personal Finance today

When married couples split, a year of adjustments with the Canada Revenue Agency can pile on more pain, writes Dakshana Bascaramurty. Here are some tips on how to keep it professional.

Once you're hitched, you're in a ménage à trois with the Canada Revenue Agency, Nora Underwood writes. You'll lose some tax breaks and you'll gain some.

When interest rates rise, it's going to hurt your bond holdings. Just how much discomfort depends on a bond's duration. Rob Carrick explains.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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