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Is Warren Buffet right about the collapse of Euro?

27 March 12:14 PM

On March 24-25^th Brussels hosted the European summit aimed at adopting a package of measures to stabilize the common European currency rate. However the EU leaders were upset not only by the protests arranged in Brussels. The resignation of the Portuguese Prime Minister was much more distressing.

There was another sensation: "Enough of a strain could cause it to fall apart," billionaire investor Warren Buffett told CNBC on Thursday. "I know some people think it is unthinkable, I don't think it is unthinkable." The American billionaire assumes that the efforts made by the EU leaders are useless as the idea of creating a common currency (EUR) was initially wrong. He points out the fact that the developed and strong EU economies have to solve the problems of the peripheral EU states such as Greece, Ireland, Portugal etc.

Masterforex-V Academy experts have analyzed the EU’s latest actions aimed at stabilizing the Euro currency.

Is Portugal a knockout or knockdown for Euro?

There couldn’t be any worse surprise for the EU summit than the resignation of the Portugal Prime Minister Jose Socrates:

· Expenditures and taxes. The anti-crisis plan offered by the Portuguese government implied significant austerity, including budgetary spending reduction and numerous tax hikes, which could eventually reduce the budget deficit from 7,3% down to 4,6%, this year, down to 3% in 2012 and down to 2% in 2014, thus matching the EU requirements. The anti-crisis plan was approved by the EU leaders, urging the Portuguese Parliament to adopt the plan as well. However, the Portuguese parliamentarians rejected the plan, saying that it may harm the well-being of the common people.

· The possibility of early elections. No Portuguese party has the majority in the parliament that is why the Prime Minister’s resignation will eventually lead to early parliamentary elections. According to the Constitution of Portugal no elections can be held within 55 days after they are announced, which means that no steps to save the Portuguese economy will be taken until June.

· Financial aid. The EU hasn’t still recovered after the multi-billion financial aid to Greece (€ 110B) and Ireland (€ 85B). Now it has to save Portugal. The financial aid is estimated at € 110B.

· Portugal is unlikely to succeed in refinancing the huge sovereign debt (€ 143 B or 83.3% of the GDP) at the expense of issuing another portion of T-bonds. The country still needs to pay off the bonds to the sum of € 9B (50% of them need to be paid off in April).

On March 16^th Moody's lowered Portugal’s rating down to А3 while on March 25^th Standard & Poor's decreased Portugal’s long-term rating by 2 levels at once from “A-” down to “BBB”. Besides, the agency’s analysts say that the rating may be lowered further.

How did the Portugal crisis affect the financial market?

Will the debt crisis spread over the major EU members? The market instantly reacted to the situation in Portugal, Masterforex-V Academy experts say.

· The Euro currency rate instantly declined. During the last week it lost about 1% against the US Dollar, reaching 1,408.

· Portugal’s T-bond yield instantly gained 8%, which is the highest value since 1999.

· After Jose Socrates’ resignation Moody’s focused on Spain, Portugal’s neighbor, which is the EU’s 4^th biggest economy. 30 Spanish banks saw their ratings declining, however the country’s major banks stayed unaffected. In early March Moody's dropped Spain’s credit rating down to the level of Аа2, with a negative forecast. However Joaquin Almunia, currently responsible for Competition, says that the Spanish economic indicators do not behave the same way as the Greek and Portuguese ones. That is why the Spanish government should cope with the current problems without any external help, he says.

· The analysts for Business Insider assume that Spain is not the only one on the list of risky countries: Hungary, Croatia, Bulgaria, Romania and Lithuania can be added to the list as well, as these countries are currently experiencing some problems in the banking sector as the situation is aggravated by high inflation and political instability.

EUR index:

According to Evgeniy Antipenko (ATEI), the head of the GTMT Department of Masterforex-V Academy, the situation around Euro is exaggerated. If the Euro currency rate fails to consolidate above 1.4870, the high of 2010, we may consider a flattish correction in the range of .4870 - 1.2870.

Only after settling below 1.2870, the support of the horizontal channel, the price may initiate another decline of Euro down to 1.1875, the low of 2010. However, the expert says the downward scenario is unlikely to take place as the current state of the US economy doesn’t indicate any possibility of such strengthening of USD.

Has the EU learned a lesson from the crisis?

At the recent EU summit the European leaders said that they had learned some valuable lessons from the crisis:

· They approved the formation of a single European stabilization mechanism, which will unite all the 17 members of the Euro zone. It will take effect in 2013. The future fund will manage the sum of €500B aimed at providing loans, with € 80B being in the form of solid cash.

· The existence of the European Stabilization Fund will be attended by tougher financial discipline, implying considerable sanctions against violators.

· They adopted the “Euro pact”, which caused protests in Brussels. The protestants say that the pact reduces the working people’s social rights.

However, not all the politicians consider the stabilization efforts to be consistent. Some of them say there is still no single procedure of recognizing the bankruptcy of a bank while the issues concerning taxes and financial transactions are still not solved.

Masterforex-V Academy experts note that the existing European Stabilization Fund has enough money to support Portugal and other countries. The question is whether the EU’s major economies will manage to withstand the pressure.

Market Leader and Masterforex-V Academy conduct a survey. You can participate in it by answering the following question at the forum for traders and investors:

Will EUR manage to stand its ground?

· Yes, it will. EUR has got significant support

· No, it won’t. It will be gradually losing its position.

· No, it won’t. It will collapse.

You are free to discuss this article here: forum for traders and investors

Text: Alexander Dynnichenko

Got a question? – Ask it here »

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