Is Portugal next?
The last weeks on the markets were nearly euphoric. Investors first covered their shorts after a calm reaction to the rating downgrades and then went bullish on the Fed. We mentioned here that despite the verbal easing done by the Federal Reserve, we might see a correction – at least such pattern occurred in November of 2010 when the Fed decided on the QE2. It would be really ironic should the profit-taking happen on Portugal – just as it did back in late 2010.
If the numbers presented by the Portuguese government are accurate, a state deficit in 2011 was nearly halved in comparison to 2010 as a consequence of serious austerity. In that case, an assumption behind the bailout plan that the GG deficit would be reduced to 5,9% GDP in 2011 could have been met. However, the price was high. As a consequence of the austerity and high fuel prices (despite a recessionary environment inflation still runs at ca. 4%) consumer demand collapsed – the retail sales in real terms declined at the annual pace of 9% in October and November. Therefore, even if the target was met in 2011, Portugal might be unable to curb the deficit more. That would mean either more funds from the European governments (who claim that the Greece is an individual case) and the IMF or a debt reduction which would certainly hit the markets hard, renewing questions about Italy and Spain.
The yield on the 10Y Portuguese bonds increased from less than 12,5% on January 13th to over 15% yesterday – the highest on record. A similar move took place in Apr’11 in case of Greek bonds when investors were increasingly worried about a possibility of a debt reduction. Interestingly through the whole April the moods were brilliant and the euro was advancing fast against the dollar on interest rate hikes expectations…
Should the Portuguese concerns elevate, the EURUSD might well return to the downward trend. Interestingly, the pair stopped just short of the key resistance of 1,32 (the level we pointed out on Tuesday) and drew a falling star candle. Today’s candle might offer (or not) some confirmation –not making new high (and preferably not even getting close) and closing below 1,3080 would draw a stronger – evening star (3 daily candles) formation.
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Przemysław Kwiecień PhD, Chief Economist |
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