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Friday, 28 February 10:59 (GMT -05:00)



Foreign exchange market

Will EU save Portugal from default?


 

Previously numerous experts form Masterforex-V Academy continuously warned the readers of Market Leader that the global economic crisis was far from being over. The disease hasn’t been 100% cured. Consequently the relapse is inevitable. Market Leader previously published some pessimistic forecasts concerning the “sick economies” of some EU countries. The forecasts start coming true.
 

Is Portugal really under threat?

Portugal has already become the 3rd EU state (after Greece and Ireland) to ask the EU authorities for financial aid:
·         The amount. The Portuguese authorities say they need €75B.
·         Numerous experts assume that the EU will eventually have to lend some part of the money to Portugal . Otherwise the collapse of the Portuguese economy may provoke the default in the neighboring Spain, which would be a heavy blow for the entire EU economy.
 
What really happened to Portugal ?
1.       Growing budget deficit. Not so long ago the budget deficit was just 7.3% of the national GDP (For comparison sake, the Greece’s one was 13%).
2.       Big public debt. It was 1.2% of the GDP (1.5% - in Greece).
3.       Portugal ’s insolvency. In the meantime the market became skeptical about the solvency of the country. The government could place the bonds only at high interests. In less than a year the 10-year T-bond yield grew form 5,8% up to 8,54%, while the 5-year T-bond yield reached the all-time record level of 10%.
4.       Exorbitant loans. In the first half of 2011 Portugal is obliged to pay back €9B. Without external financial aid it will be impossible.
5.       The investment climate in Portugal is worsening. Its credit ratings are being decreased as well.
6.       Portugal ’s GDP is declining despite all the forecast.
7.       The unemployment rate is growing, causing protests around the country.
8.       The opposition in the Portuguese parliament didn’t let the government introduce austerity measures.
9.       The Prime Minister Jose Socrates resigned.
 
Why won’t the EU leave Portugal in trouble?
·         Before resigning Jose Socrates asked the EU and the IMF for financial aid. It was a coercive measure as the national banks refused to purchase the Portuguese bonds.
·         The representatives of the EU and the IMF instantly started analyzing the country’s budget. According to them, in 2010 the budget deficit reached 8.6% of the GDP which is much higher than the limit of 7,3%.
·         The EU finance ministers discussed the Portuguese issue and said that the financial aid would be provided only if the Portuguese authorities introduced austerity measures (tougher than those offered by Jose Socrates).
·         According to the Euro Commission, within the next 3 years Portugal will need € 80B ($115B) in order to cover the budget deficit and support the national banking system. Portugal will have to reduce the budgetary spending down to 0.8% of the GDP.
·         The EU has to take such a step in order to support the common Euro currency and to make the financial markets calm down.
 
What are the possible consequences of such financial aid for Portugal ?
Masterforex-V Academy experts say that the new debt is unlikely to make the Portuguese economy healthier.
1.       The IMF already lent to Portugal in the 1980s, which only aggravated the situation.
2.       Many Latin American countries borrowed loans under similar conditions, which didn’t lead to any economic growth in country (the economies became subdued).
3.       3. The neoliberal policies of the latest Portuguese governments destroyed all the effective sectors of the national economy: agriculture and some export industries (like fish and mining industries). Oligarchs were allowed to invest in the Portuguese housing, banking and tourist sectors.
 
How does the financial aid affect the EU’s financial system and what should investors be ready for?
EURUSD:

 

 

 

 

On April 12th EURUSD updated the high of January 2010 (1.4520), decreasing the purchasing power by 18%.
On April 7th for the first time in 3 years the ECB increased the interest rates trying to curb the inflation. The US Dollar is expected to strengthen as the US Fed Reserve is going to finish QE2 in late June.  According to the tech analysts from Mizuho, EURUSD will decline down to 1.40.
 
According to the Department of studying Masterforex-V trading system , the currency pair keeps forming the upward wave C of Weekly. As opposed to Mizuho, they say that in order to see a trend reversal the following conditions should be met:
1.       Coming out of the MF sloping channel
2.       Breaking below the MF pivot
3.       The formation of a full-grown FZR
4.       The Support of the AO
At the moment the currency pair is only forming a bearish wave of the senior timeframe, which will need a pullback and a “moment of truth”. The AO is above the zero line on H4, which means that the uptrend is not reversed. 1.4520 (the high) will be the next closest resistance level.
 
How long will the EU be saving Portugal ?
·         In the short run the burden will probably be put on the shoulders of Portugal itself.
·         At the end of last month the EU authorities approved the amendments to the Stability and Growth Pact, introducing fines for those EU countries violating the ratio between the GDP and the sovereign debt. The Euro-zone violators will be punished both for violating the ratio and for economic imbalance.
·         The states will be obliged to deposit to the Stabilization Fund the sum equal to 0.2% of their GDPs as a guarantee.
·         If the requirements are violated the deposited money won’t be given back.
·         It is expected that such a measure should make the EU governments pursue much more reasonable policies.
Market Leader and Masterforex-V Academy offer you to participate in a survey by answering the following question at the forum for traders and investors:
Is Portugal the biggest problem for the EU?
·         Yes. It is. The admission of Portugal to the EU was an unreasonable step.
·         No, it isn’t.  Apart for Portugal there are other debt-ridden countries with bigger problems (and requiring more substantial aid) such as Greece and Ireland.
 

 

 

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