[The following commentary is from the companion investment website Iacono Research. Apparently, I'm a little more sanguine than many others about the prospects for Europe.]

It was another tumultuous week in Europe but one that, in my view, increased the odds of the common currency surviving over the long-term and carried valuable lessons about what can and should be done in other Western nations such as the U.S. and the U.K. where similar structural budget problems continue to fester.

Early in the week, Fitch Ratings downgraded Portugal sovereign debt and, in the absence of any news flow in the run-up to a meeting of the EU (European Union) on Thursday, the euro tumbled to an 11-month low. The ratings agency warned that another downgrade for Portugal could follow and it looked rather bleak for the “single unit” until an agreement was struck between German Chancellor Angela Merkel and French President Nicolas Sarkozy on terms of a bailout for Greece, should one be required, that included support from the IMF (International Monetary Fund).

Like Greece, Portugal is struggling with large budget deficits, large trade deficits, and continuing economic contraction that has led to high unemployment, though none of these conditions are as bad as their Aegean neighbor to the East is now seeing. With budget fixes not coming fast enough to bring their deficit below the euro zone limit of 3 percent by 2013, Fitch lowered their sovereign debt rating to AA-minus, just above the BBB-plus for Greece, the lowest in the euro zone. In a statement, Fitch noted, “The planned deficit adjustment is back-loaded and the risk of macroeconomic disappointment … is significant”.

While this came at an unfortunate time, just as EU leaders were dealing with new concerns about Greek debt, it was not a surprise as the Portuguese government has struggled in making necessary spending cuts and, importantly, this will not be the last of the debt downgrades in the region.

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