15 Jul 2013
Portugal: much of the same problem.
FXstreet.com (London) - Portugal, having otherwise ridden out the storms pretty well, and financially resilient in a longer than expected (by most) rescission, has greatly unnerved the markets of late.
The government is on the verge of collapse on the basis of the internal opposition to their austerity measures. Unemployment is looking like it will breach 18% and that has angered voters. We have since seen their Finance minister resign, Vitor Gaspar, and then we said cheerio to the foreign minister, Paulo Portas and bonds fall and yields revisit sky-high levels.
In the short term, the county is actually ok financially and doesn’t need to borrow any more money from the markets ‘this year’. Their problems for now are not financial and as ECB governor Draghi pointed out in his last press conference, they have made some remarkable progress through the tough times.
Their real problem will come from the subsequent ramifications if their rocky government fails; compromising the much needed economic reforms. The debt problems of their nation are met with a country that hadn’t really been a part of nor enjoyed the ‘glory days’. With a low skilled work force and not being particularly competitive, the economy is simply stagnant.
In the longer term, yes, their debt could become a problem and that is where the real risk lies in financial markets. Also a concern is for how they could sustain the EZ shared rate. However, it is not going to be a case that when the next government steps in, they will simply abandon the Euro, as the one size doesn’t fit all measure takes fold. No, they would simply be a replacement and fill the already worn shoes of the current government and keep walking to a slow and drawn out reform - hopefully.
For that reason, they are going to need help to pay of the national debt - thanks Germany! On that note, over the weekend, the country’s three main parties have decided upon a date as a deadline to agree upon a ‘national salvation pact’ in order to salvage their EUR78B rescue package before early election take place 2014.So let’s see what happens. We can be assured that between now and then, markets will remain jittery, stock prices, currency rates and bond prices will be tracking the nervousness around the ‘EZ’ nations.
Meanwhile, what about Americas threat to stop printing money? Put aside the benefit it will bring to the ECB in weakening the single currency, which is good news, look a little deeper and we will see the cost of borrowing for the government rising. When yields rise in he US, then so to will yields in global assets, broadly speaking. That’s bad news when the ECB cannot afford to buy the bad debt of its member nations to try and help maintain their borrowing costs. Then of course, investors are less likely to be willing to stick their idle capital into struggling EZ nations.
The real question here is whether this is the beginning of not just Portugal’s problem, but the EZ as a whole. If Portugal’s borrowing costs get to an unsustainable level, then who might be next, Spain, Italy? If that were the case then the ECB will have no choice but to print money. So, just when markets thought we had a foothold on the situation, its actually just another page being turned over into a new chapter, and of much of the same problem.
The government is on the verge of collapse on the basis of the internal opposition to their austerity measures. Unemployment is looking like it will breach 18% and that has angered voters. We have since seen their Finance minister resign, Vitor Gaspar, and then we said cheerio to the foreign minister, Paulo Portas and bonds fall and yields revisit sky-high levels.
In the short term, the county is actually ok financially and doesn’t need to borrow any more money from the markets ‘this year’. Their problems for now are not financial and as ECB governor Draghi pointed out in his last press conference, they have made some remarkable progress through the tough times.
Their real problem will come from the subsequent ramifications if their rocky government fails; compromising the much needed economic reforms. The debt problems of their nation are met with a country that hadn’t really been a part of nor enjoyed the ‘glory days’. With a low skilled work force and not being particularly competitive, the economy is simply stagnant.
In the longer term, yes, their debt could become a problem and that is where the real risk lies in financial markets. Also a concern is for how they could sustain the EZ shared rate. However, it is not going to be a case that when the next government steps in, they will simply abandon the Euro, as the one size doesn’t fit all measure takes fold. No, they would simply be a replacement and fill the already worn shoes of the current government and keep walking to a slow and drawn out reform - hopefully.
For that reason, they are going to need help to pay of the national debt - thanks Germany! On that note, over the weekend, the country’s three main parties have decided upon a date as a deadline to agree upon a ‘national salvation pact’ in order to salvage their EUR78B rescue package before early election take place 2014.So let’s see what happens. We can be assured that between now and then, markets will remain jittery, stock prices, currency rates and bond prices will be tracking the nervousness around the ‘EZ’ nations.
Meanwhile, what about Americas threat to stop printing money? Put aside the benefit it will bring to the ECB in weakening the single currency, which is good news, look a little deeper and we will see the cost of borrowing for the government rising. When yields rise in he US, then so to will yields in global assets, broadly speaking. That’s bad news when the ECB cannot afford to buy the bad debt of its member nations to try and help maintain their borrowing costs. Then of course, investors are less likely to be willing to stick their idle capital into struggling EZ nations.
The real question here is whether this is the beginning of not just Portugal’s problem, but the EZ as a whole. If Portugal’s borrowing costs get to an unsustainable level, then who might be next, Spain, Italy? If that were the case then the ECB will have no choice but to print money. So, just when markets thought we had a foothold on the situation, its actually just another page being turned over into a new chapter, and of much of the same problem.