Sovereign-sovereign contagion When Moody’s downgraded Portugal on 5 July, it cited, among other factors, developments in Greece.8 Moody’s believed that contagion from a default of Greece made it more likely that Portugal would require a second round of official financing. Moreover, referring to Greece as a precedent,9 Moody’s indicated that a second round of official financing would entail private sector participation also in Portugal.
Unfortunately, this was not the end of the story. The downgrade of Portugal and, above all, the continuing fears of a Greek default apparently triggered a sell-off in Spanish and Italian government bonds. There had not been adverse data releases concerning the Spanish and Italian economies or budgetary situations around that time.