Friday, February 08, 2013

Houston, we have a problem... Portugal!

Though EU & IMF have agreed on an audacious $956 billion bailout plan for the Euro zone to control the sovereign debt crisis that started with Greece, it won’t be of much help. B&E talks to experts across continents, including the European Central Bank to analyse who all are next in the felicitation parade by Manish K Pandey
 
Almost a month ago when ash clouds from Iceland’s volcano Eyjafjallaj-kull were showing their prowess by bringing almost all European airports to halt, not many knew about the danger that was about to engulf Greece and had the capability of bringing some of the biggest euro zone economies to a standstill. Then it came and even Greek gods could not save their beleaguered nation from its fury. Result: The $333.53 billion economy (2009 estimate) has today almost but collapsed. While Standard & Poor’s has already rated Greek bonds as junk (first time a euro member has lost its investment grade since 1999), its fiscal deficit is hovering around 14% of GDP.

As Greece now moves closer to a sovereign default, several economists believe that the turmoil would not end here, and would continue to take some more in its wake. Taking into account the deteriorating financial strength of the banking systems in nations like Ireland, UK, Spain, Italy, et al, any or all of them could be the usual suspects. But leading the identification parade is Portugal, a country could well be the talk of the town very soon with respect to a domino collapse. Robert Thomas, Senior Vice President, Moody’s Investor Service, based out of UK, shares with B&E, “Despite many fundamental differences to Greece, Portugal is now at the forefront of investor concern if the risk of contagion continues.”

The signals sent by Portugal are almost similar to the ones propelled by Greece just before the financial volcano erupted there. Like its distressed Euro-partner, Portugal too has a fragile public finance. Its budget deficit is already around 9.4%, which is an astonishing 6% higher than the standards set by EU. Further, Portugal’s foreign liabilities are close to 108% of its GDP ($225.35 billion), much higher when compared with Greece whose foreign liabilities stand at 87% of GDP ($264.82 billion). Truly, Spain too has foreign liabilities that are equivalent to 91% of it GDP ($1.20 trillion), but unlike Spain, Portugal has been suffering from a bigger problem of very slow growth rates over the last decade. CMA DataVision, a UK-based research firm that tracks the riskiness of sovereign debt, rates Portugal’s performance during Q1 2010 to be the worst in the developed world. As per it, the spread between the starting price of swaps in January 2010 and the end price in March 2010 has widened to 52.3%. So, while last year Portugal’s GDP declined by 0.1%, this year it is forecast to slow down even further, by 3.3%. And the only solution that Portugal has if it wants to stick to the lifeline is to borrow from foreign investors. But, that’s exactly where the problem lies. If interest rates stay high, this dormant volcano can erupt any time to engulf the Portuguese economy. Not to forget, investors are already demanding an interest rate of 6% on Portuguese bonds.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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