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Posts Tagged ‘Portugal’

Why Portugal May Be the Next Greece

Posted by Admin on May 22, 2012

http://business.time.com/2012/03/27/why-portugal-may-be-the-next-greece/

Why Portugal May Be the Next Greece

The worst is over for the euro zone, the experts say. But Greece isn’t really fixed and Portugal could become a second big problem before year-end

By Michael Sivy | @MFSivy | March 27, 2012

When Greece celebrated its Independence Day on Sunday, there were scattered protests over the harsh austerity program aimed at stabilizing the country’s finances. The government reportedly removed low-hanging fruit from bitter-orange trees along the parade route, so it couldn’t be thrown by protesters. But, basically, the most recent bailout appears to be successful. As a result, worries about the European financial crisis have diminished somewhat. Indeed, European Central Bank president Mario Draghi has said that the worst is over for the euro-currency zone.

Such optimism may be premature, however. Not only does Greece remain a long-term financial concern, but in addition Portugal is on track to become a second big problem.

The dangers Greece still poses are clear. Higher taxes and government-spending cuts may reduce new borrowing, but such austerity policies also undermine a country’s ability to pay the interest on its existing debt. Unless accompanied by progrowth policies, austerity can become the financial equivalent of a medieval doctor trying to cure patients by bleeding them. In addition, the bailout plan for Greece consisted of marking down the value of much of the country’s debt held by banks and other private lenders. That means entities such as the European Central Bank now hold most of Greece’s remaining debt. And so, in the event of a default, important international institutions would suffer the greatest damage.

(MORE: Is Germany’s Euro-Crisis Strategy Actually Working?)

The net result has been to postpone the Greek financial crisis for months or even a couple of years, while raising the stakes if things go wrong. That could be seen as a considerable achievement, if you believe Greece is a unique case and that the problem has been successfully contained. The trouble is that other countries — and especially Portugal — seem to be heading down the same path. Here’s why forecasters are worried:

Portuguese interest rates haven’t come down. Because of the Greek crisis, bond yields rose to dangerous levels in several financially troubled European countries. Then after Greece was bailed out, yields fell in most of them. In Italy, yields on bonds with maturities of around 10 years dropped from more than 7.2% to around 5%; in Spain, from 6.7% to 5.4%; and in Ireland, from 9.7% to 6.9%. The notable exception was Portugal, where bond yields came down a bit but still remain above 12%. Double-digit borrowing costs are impossible for a heavily indebted country to sustain for any significant period of time. Yet Portugal’s bond yields have been above 10% for the past nine months.

Portugal’s total debt is greater than that of Greece. In one way, Greece really is unique — the country’s massive debt is largely the result of borrowing by the government rather than by the private sector (corporations and households). By contrast, Portugal, Spain and Ireland have far more private-sector debt. As a result, while government debt in Portugal is less than that of Greece, relative to GDP, total debt (including private-sector debt) is actually greater.

(MORE: The Most Important Man in Europe)

The Portuguese economy is shrinking. Portugal’s economy has been weak ever since the financial crisis began in 2008, and the country has actually been in recession for more than a year. Moreover, last month the Portuguese government projected that the country’s economy would contract by 3.3% in 2012. As Portuguese companies struggle to pay off their own massive debt, it’s hard to imagine that they will be able to help pull the country out of recession.

Thanks to a bailout last year, Portugal has enough money to make it into 2013, despite brutally high interest rates and a shrinking economy. But the markets are unlikely to wait that long to go on red alert. In the case of Greece, bond yields topped 13% in April 2011, and by September they were above 20% and heading for 35%. Portuguese yields have been above 11.9% for the past four months and have topped 13% several times. If the country follows the same timeline as Greece, Portugal could suffer a serious financial crisis before the end of the year.

There are a number of reasons such an outcome would be serious, despite the relatively small size of Portugal’s economy. First, the European Union has been operating on the assumption that Greece is a unique case, a poor country suffering from rampant tax fraud and an unusually dysfunctional government bureaucracy. If another euro-zone country experiences similar problems — and they occur partly because of private-sector debt rather than government borrowing — then the flaws in the system start looking more general, and the stability of the entire euro zone is called into question.

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Moreover, much of the borrowing by Portuguese companies has been financed by Spanish banks. That creates the possibility of a domino effect, whereby a financial squeeze in Portugal leads to a crunch in the Spanish banking sector. Moreover, the debt structure in both Spain and Ireland — with large amounts of private-sector borrowing — is similar to that of Portugal. Germany and the Netherlands are already balking at making further loans to Greece. And although Northern European countries could afford to bail out Portugal, their resources are limited. If a second country goes the way of Greece, several more might well follow.

Since Europe’s problems seem to have receded for the moment, U.S. investors are understandably focused on other risks — like conflict with Iran that could sharply push up oil prices, or fights over taxes and the federal budget in the run-up to the elections. But the danger of a European financial crisis has not gone away — and the ultimate costs could run to more than half a trillion dollars.

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Is this the biggest crisis of all?

Posted by Admin on March 31, 2011

Proportion of CDSs nominals (lower left) held ...

Credit Default Swaps held by U.S.A Banks

http://in.finance.yahoo.com/news/Is-biggest-crisis-equitymaster-812900507.html

On Thursday 31 March 2011, 8:30 AM

We seem to be living in rather fragile times. There is too much going on in the world that can yet again derail the global economy. There’s the oil price and then there’s the Middle East turmoil. The Japan earthquake was a sorry addition to the list. And not to forget, the US economy is still not completely out of danger, trillions of dollars worth of injections not withstanding.

Clearly, the battle seems to be on as to what will really upset the applecart this time around. But what if we say the most likely candidate is not even in the list of events that we just discussed. It has somehow got pushed to the backburner.

But perhaps not anymore. Forbes adds that a severe escalation in Europe‘s credit crisis has the capacity to cause a repeat of the 2008 meltdown. Indeed, the chance that anyone or all of the so called PIIGS nations could default keeps rising by the day.

Not a week goes without something nasty taking place in any one of these nations. The latest issue to flare up has its roots in Portugal. Apparently, the parliament of the peripheral European nation recently voted against austerity measures of any kind. Not surprisingly, the ratings agencies swung into action and promptly downgraded the country’s sovereign debt ratings.

Other of the PIIGS may not be far behind. Already, Greece, Ireland and Portugal are commanding a heavy premium over the other two in the highly punitive Credit Default Swaps (CDS) market. CDS is nothing but an instrument that helps insure against defaults by corporate or sovereign bonds. Higher the premium, greater is the probability of a default.

Forbes adds that if Italian or Spanish CDSs start being grouped alongside Ireland and Portugal, it could signal a tipping point of sorts. This will then lead to a problem that will not be solvable by tossing another 100 billion Euros at the problem. And it will be not just sovereign bonds that will be on the line. It can have a huge impact on the European banking system. Not to forget the flight to safety attitude of investors that could spark a global sell off.

Thus, there you go. For the next few weeks, do not worry about the Japan tragedy much. Neither do fret about how high oil is headed next. Keep an eye on those troubled Euro nations. Particularly the risk premium they are commanding in the default market. And this would be the key to unlocking the mystery of the direction of the global economy.

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IMF chief to activate crisis fund next week

Posted by Admin on March 27, 2011

http://in.finance.yahoo.com/news/IMF-chief-activate-crisis-reuters-2530807212.html

On Friday 25 March 2011, 5:01 AM

 

By Lesley Wroughton

WASHINGTON (Reuters) – The head of the International Monetary Fund will seek to activate a $580 billion crisis fund next week, a confidence-building step at a time of heightened global uncertainty.

“The biggest worry is the high risk of contagion from Portugal and general global uncertainty will trigger a new wave of borrowing from the fund,” a source familiar with the plan said. Two other sources also said economic worry spots were behind the expected move.

The IMF confirmed that IMF chief Dominique Strauss-Kahn would seek to activate the fund — New Arrangements to Borrow — but said it was a “natural consequence of ratification of NAB on March 11, which was previously announced.”

Still, the global worry list has expanded in recent weeks because of Japan’s earthquake and nuclear crisis, as well as unrest spreading in the oil-producing Middle East and North Africa.

Concerns about Portugal’s debt crisis increased on Wednesday after the sudden departure of its prime minister made it likely that the country may not avoid turning to the European Union and IMF for financial help.

Sources emphasized that Portugal had not requested IMF bailout money and insists it is adamantly opposed to requesting IMF help. The country first has to request IMF help to trigger formal discussions on a rescue loan and program.

So far, Portugal has managed to finance itself in capital markets although government borrowing costs spiked on Thursday and rating agency Fitch cut Portugal’s credit rating by two notches to A- saying risks to the country had risen after parliament failed to pass fiscal consolidation measures.

The concern is that Portugal’s debt woes has wider repercussions, with neighboring Spain holding about one-third of Portuguese public debt.

In a statement on March 11 announcing the NAB had taken effect, the IMF called it a tool to “provide supplementary resources to the IMF when these are needed to forestall or cope with a threat to the international monetary system.”

The NAB was expanded ten-fold from $53 billion last year to include 13 new contributors, among them large emerging market economies like China, Brazil, India, Russia and Mexico.

The United States is the largest contributor to the fund through a $100 billion credit agreement approved by President Barack Obama in 2009.

The move was in response to a call by the Group of 20 leading economies in 2009 to triple the IMF’s lending resources to shore up confidence in its ability to respond to crises.

The IMF has been at the center of the response to the financial meltdown and recession as the global lender of last resort, recently approving emergency loans to Ireland and Greece.

(Editing by Dan Grebler, Bernard Orr)

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