That’s right folks, Portugal has agreed to the EU- IMF’s proposed bailout plan! It’s a little surprising to see how it all went down so smoothly, considering where Portugal was just over a month ago.
Late in March, Portuguese Prime Minister Jose Socrates decided to call it quits after the government couldn’t agree upon austerity measures.
In addition to that, there were already signs that Portugal was struggling. First, the government announced that it wasn’t gonna hit its target deficit-to-GDP ratio of 7.0%, coming up short at 8.6%. Second, Portugal was smacked with repeated downgrades from our favorite ratings buddies at S&P and Moody’s.
When the Portuguese government finally came to its senses, it cried uncle and asked for some help on April 6. Over the past month, EU and IMF officials have been working hand in hand to come up with a master plan to help out Portugal.
It looks like it worked! Earlier this week, the Portuguese government formally accepted the EU-IMF bailout proposal. While details of the package have yet to be released, word is that up to 78 billion EUR will be available. Out of those funds, 12 billion EUR will be set aside for Portugal’s floundering banking sector, to help shore up the bank’s ability to withstand losses.
Just like Greece and Ireland, the government will also have to adhere to strict austerity measures (did they really think they could avoid that?). The good news though is that it was given a little more leniency in terms of reaching the EU’s mandated 3% deficit-to-GDP ratio.
Now that’s a lot of drama and action! It’s just too bad that it wasn’t enough to lure the euro bears to the currency. EUR/USD ended Wednesday on a draw at 1.4831 after it hit a high of 1.4940. In fact, if you look at the daily chart of EUR/USD, you’ll see that EUR/USD has actually RISEN to 2009 highs. What gives?
One possible explanation for the euro’s rise is the ol’ carry trade strategy. If you’ve been browsing through the awesomest forex education site, you’ll know that traders can also make moolah on interest rate differential. With the ECB being a lot more hawkish than the Fed the past few months, it’s no surprise that everyone’s been jumping on the long euro bandwagon!
Whatever the reason for the euro’s price action, we have to keep in mind that this is not the end of Portugal’s (and the euro zone’s) debt problems.
For one, Portugal’s debt problems are just as bad as Greece and Ireland’s. With Greece possibly needing to restructure its debt soon, who’s to say that Portugal won’t be in the same boat some time later down the road?
For the next couple of weeks the markets will probably turn its radars on Ireland. Like Portugal, the country’s politics is also heating up. And don’t even get me started on its banking problems! In the Irish banking article that I wrote last month, I mentioned that Ireland needs 24 billion EUR on top of the government’s 46 billion EUR contribution just to save its banking sector.
Though the market didn’t react much to the news of Portugal’s bailout, it doesn’t mean that the incident doesn’t impact sentiment for the euro zone. In fact, it serves as reminder that the region’s sovereign debt issues aren’t forgotten, but are just pushed in a corner of a somewhere, ready to pounce at a moment of weakness (cue evil laugh).