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Portugal; at the cliff-edge?

Events over the past 24 hours have served to highlight the institutional short-comings of the single currency that we’ve highlighted before. Firstly, Portuguese prime minister Socrates has resigned, failing to secure further austerity measures.   As such, an early election looks inevitable, as does a bail-out from the EU. Secondly, all indications are that the EU summit, starting today, will not agree an overhaul of the European Financial Stability Facility (EFSF). This was intended to extend the lending capacity of the facility.   The reasons hinted at are “internal procedures” and elections due in some countries.

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Both highlight the problem of running a currency without a government, with national administrations looking to their own domestic electorates and issues first and reluctant to cede to what may be best for the euro area as a whole.
The single currency itself had a relatively muted reaction, softening in line with most others on a firmer dollar, but selling has been exacerbated this morning on Moody’s downgrade of several Spanish banks. Still, ten months after the Greek bail-out, it doesn’t feel that the eurozone credit crisis is anywhere near resolution.   Indeed, rate increases from the ECB would push closure even further away from the EU’s grasp.


Portugal now facing an election and near inevitable EU bail-out. The government has EUR 4.3bn of maturing debt to refinance in the middle of April, which is going to be a tall order given last night’s rejection of the latest austerity measures and impending election.   Yields in Portugal are now pushing just above record highs since the start of the single currency in 1999.

For now, sterling unmoved by UK budget. Yesterday’s budget statement had little impact on either sterling or interest rate markets.   Although being fiscally neutral, there were plenty of changes, especially to corporation tax. The big concern overall for markets is whether the economy will be able to grow sufficiently for the projected improvement in borrowing figures to be achieved.   For us, there’s also the observation that a lot of the additional revenue for the upcoming fiscal year in April is seen coming from tax avoidance measures, which are always easy to announce, but far more difficult to implement.  

The (bad) luck of the Irish. Ireland’s new leader Enda Kenny may have talked tough during recent negotiations with the EU, but the continuing refusal to shift on the 12.5% corporate tax rate question meant that he came away empty-handed. Greece meanwhile got both more time and a lower interest rate on its bilateral loans, for the promise of conducting €50bn of asset sales. Surely no-one involved on the EU-side of these negotiations believed this undertaking – it has virtually no hope of being achieved over the next three years given the domestic hostility to selling off the country’s family silver.


For the Irish, the market is clearly of the view that, in the absence of a denouement with Europe, the situation is worsening. Yesterday the 10yr Irish government bond yield reached 10%, a new record high since the introduction of the euro. There were rumours on Tuesday that Allied Irish had missed an interest payment, although that has yet to be confirmed. New Irish FinMin Noonan claims the 12.5% corporate tax is non-negotiable, although he accepts that there is room for other adjustments. It would be interesting to hear exactly what he has in mind. Perhaps Ireland will offer to be one of the first to legislate to put a permanent brake on government debt, as Germany so desperately wants to see.


The new Irish Government needs to decide quickly what it is prepared to offer – the next opportunity to get the interest rate reduced comes on Thursday and Friday at the next EU summit.

Swiss franc still the chosen one. Against the backdrop of considerable geo-political tension in both the Middle East and North Africa, the economic destruction wreaked by the earthquake and subsequent tsunami in Japan, and the financial stench from the eurozone periphery, it is little wonder that the Swiss franc remains the chosen one for the forex markets.


In the current month alone, the Swiss currency is the best-performing major currency, up 2% against both the dollar and the pound and by 1% vis-a-vis the Japanese yen. This week’s gains are a natural response to the worsening situation in Portugal and the growing sense that a bailout is virtually inevitable. For its part, the SNB does not seem overly perturbed by the strength of the currency, which is actually helping at a time of rising import prices.   One word of warning however – traders and hedge funds have not been this bullish on the Swissie since late 2004. In the following year, the Swiss franc lost 15% against the dollar!

Looking Ahead

Thursday: JPN:
Merchandise Trade Balance, February (expect JPY709bn, previous JPY192bn); FR: Business Confidence, March (previous 106); GER: PMI Manufacturing, March a (expect 62.0, previous 62.7); PMI Services, March a (expect 58.1, previous 58.6); EC: PMI Manufacturing, March a (expect 58.2, previous 59.0); UK: Retail Sales, February (expect -0.5%, previous 1.9%); US: Durable Goods Orders, February (expect 1.0% MoM, previous 2.7%); Initial Jobless Claims (previous 385K); Bloomberg Consumer Comfort.

Friday: FR: Consumer Confidence, March (previous 85); GER: GfK Consumer Confidence, April (expect 5.8, previous 6.0); IFO Business Climate, March (expect 110.5, previous 111.2); US: GDP, Q4 revision (expect 3.0% SAAR, previous 2.8%).

Source: Bloomberg


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