Macro Digest: Portugal - The Black Swan of the summer?

Portugal - The Black Swan of the summer?

Portugal, under severe economic pressure from a lack of growth, a bloated public sector and more than a decade on non-growth, most likely will see its government fall inside the next 48 hours, despite assurances from Prime minister Pedro Passos Coelho that he will not resign.

The government has constantly undershot all of its targets and as late as March this year, was forced to admit that growth was collapsing at twice the expected rate. Despite this, the governement and the European Union continues to see 2015 as the "magical year" when growth comes down from the sky; the budget deficit shrinks to inside the 2015 three-percent limit; and we see a turnaround of three percent in austerity (as growth is not expected to rebound before the end of 2015). Unrealistic!

To say the least.Portugal does not have any financing needs before 2014, but the market has reacted quite negatively the last couple of days:

 

The general trend for the 10-year bonds is also very negative:

 

Prime Minister Coelho is apparently travelling to Berlin today for a conference on youth unemployment but he must know the game is over as he is trailing by a full 12 percentage points in the polls:

There is an excellent series of updates from CNBC here. 

Conclusion
The coalition is falling, and falling soon. The prime minister is playing a political game. Expect the government to fall in the course of the next 48 hours. A new election will be called amid a huge drive towards "anti-austerity".

This is EXACTLY what German chancellor Angela Merkel does not need. Her election campaign is on its way and doing well, now she will, again, need to address a Club Med country during her holiday. The German election makes the EU less likely to do anything to keep Portugal afloat. But remember the losers, always, when politicians buy time, is the underlying economy and citizens.

The big loser this morning is Portugal as a country. I see Portugal doing second bailout inside next six month as the reality of economic non-progress will ultimately weight higher than political ability to buy time.

EURUSD should be under pressure into ECB's press conference and I see 1.2800 being tested.

We have not even talked about the fact that Greece is very close to NOT get its next Troika installment:

Exclusive: Greece has 2 days to deliver or face consequences - EU officials

The summer of discontent?  Egypt, Syria, Turkey, Portugal, Greece and ?Safe travels,

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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