Portugal: Spain’s neighbor in the Iberian Peninsula already received a bailout program and is struggling to keep up. The hidden debt in the island of Madeira as well as the ongoing recession could make Portugal the second domino to fall after Greece does.
Here are three scenarios for Portugal:
- Meddling along: The common scenario has the highest chances. This will be terrible for the Portuguese, but will not impact the euro.
- A second bailout program: Like Greece, more economic downturn brings less revenue, a bigger deficit, more austerity and more economic downturn. Portugal could follow the Greeks with talks about additional aid. This will weigh on the euro. Chances are medium.
- Default / leaving the euro-zone: This will likely happen only after it happens in Greece, but could happen very fast. The chances are slim but real. It will weigh on the euro, and the next domino will be sought.
This analysis originally appeared in the Forex Outlook for Q1 2012. You can download the full report for free by joining the mailing list in the form below.
Ireland
This country is different from the other bailed out countries in many ways: it had a real estate and banking bubble, not a government debt issue. When it backed the banks, the back was broken and the bailout arrived.
The Irish bailout story is considered a success story, but it’s hard to believe that this is what the people in Ireland feel.
Ireland managed to keep up with the plans so far; its economy grew, and so did tax revenue. Ireland’s bond yields dropped. This even prompted politicians to declare that the country will return to the markets earlier than expected.
Not So Good
Well, Ireland still suffers from emigration and rising unemployment. So, normal people aren’t really bailed out. In addition, the economy turned around and contracted once again. So where’s the success?
There is small chance that Ireland will be in the news during Q1. If it does, this will be bad news and a nail in the bailout coffin. If Ireland seeks more aid or gets into conflict with Europe, this will hurt the euro as well.
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