Euro Zone Credit Crisi Part 3: Portugal

Discussion in 'Politics' started by hsarge, Jul 5, 2011.

  1. hsarge

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    I see S&P has downgraded Portuguese debt to junk status and projects an imminent default.
     
  2. Drifterwood

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    Can't be any more money to be made out of the Greece situation.
     
  3. Jason

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    S&P have said that Portugal will need a second bailout.

    I think the new pressure point is on the ECB which has been buying peripheral debt. Once a nation is declared (by the ratings agencies) to be in default then this debt should be down-valued, usually to zero.

    I'm not sure whether the ratings agencies can directly rate the ECB - but they can rate all the EuroZone nations. The scenario is as follows:

    * Greece is declared in default by all three. Possibly Ireland and Portugal follow.
    * The ECB's periphery debt should be marked down by the ECB but will certainly be marked down by the ratings agencies. The ECB will be deeper into technical insolvency -it may actually cross the line where even on paper its liabilities are greater than its assets.
    * The ECB will need refinancing from the EuroZone nations. This will cause substantial credit agency downgrades of every one. It is not clear that the EZ nations can afford the refinancing.

    Received wisdom has been that the domino that would topple the euro is Spain - and that Portugal would be the one to bring down Spain. Maybe. But the scenario I'm now seeing is one where the whole euro project is shown to be unworkable. It is not possible to have (sustainable) monetary union without fiscal union. The Eurozone hasn't got the fiscal union and indeed is trending towards more fiscal divergence. It probably cannot raise the funds it needs to refinance the ECB.

    This is dire.
     
  4. dandelion

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    i was talking to a chap the other day...who pointed out what perhaps should be obvious. There is a futures market in national debt! So sell it, force the price down and then buy it to cover what you have already sold. Make money! So... it has NOTHING to do with the solvency of the country or the system but EVERYTHING to do with bankers making a buck at everyones expense. (why is that not a surprise....) ....
     
  5. Jason

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    I love the source!

    This scam wouldn't work. Sell enough bonds and indeed you cause the price to fall both now and in the futures market. Start buying in the futures market that you have depressed and you cause the price to rise. The two movements roughly cancel out, but then the transaction charges have to be factored in. Then there are issues of legality - trading which intends to manipulate a market is illegal, is subject to checks by regulatory bodies and would be treated as a scam.

    The EuroZone problem is caused by the political decision to attempt the impossible - a currency union without a fiscal union. Efforts to blame the banks, the credit rating agencies or anyone else are a waste of time. At the time the euro was started it was known by everyone who had done Economics 101 that it could have only a very short life without fiscal union - the idea was that both the European Constitution and a second constitution to create a single sovereign state would be through by now. The trend is now for the nations of Europe to be less fiscally and politically integrated - lots of bickering - and we aren't going to get some race to union. IMO we are now looking at certain failure of the euro - the question is how long it can stagger on. And that also means failure of the EU. We need to plan to manage the process.
     
  6. dandelion

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    Gosh! someone should tell the city of London and the UK government!

    We have time to waste. Do you mean they are futile because we shall never catch them red handed?


    You know we dont agree. This is thinking inside the box, but even inside the box there is already a high degree of fiscal integration within europe.
     
  7. Jason

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    True.

    Fiscal union certainly means broadly the same tax/spend/social policies, and there is a lot of similarity, but it also requires broadly the same wealth levels. Even in the UK there are stresses and strains between London/SE and the rest. Within the EZ the difference between the most and least prosperous is just too big.

    There is an interesting question around whether had a United States of Europe been created and enforced the same tax/spend/social policies, would this have been enough to make the euro work? IMO it would have had a chance, but still very major problems.
     
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