Despite April Fools' Day, the very beginning of April wasn’t funny for the EU. Fitch Rating lowered Portugal’s long-term credit rating by 3 levels at a time (from А– down to ВВВ–) while the short-term rating was decreased from F2 down to F3. For both the ratings the forecast is negative. It should be noted that Fitch lowered Portugal’s ratings just a week ago, on March 24th.
Almost at the same time another credit agency called Standard & Poor's decreased Ireland’s rating down to ВВВ+. However there was no negative forecast. Moreover, Ireland was removed from CreditWatch List.
A couple of days ago Standard & Poor's also decreased Portugal’s rating down to BBB- and Greece’s rating from BB+ down to BB- (2 levels down). The rating of Cyprus was decreased as well (from A down to A-, with a negative forecast) as the country is dependent on the Greek financial system.
Warren Buffet’s prophecy about the collapse of Euro keeps hanging over the Euro zone. What is happening in the Euro zone and how it can affect the stability of the common Euro currency? experts tried to clarify the situation.
Portugal: what is so dangerous about it for the EU?
According to the analysts for MigBank (one of the leading forex brokers), the latest succession of events doesn’t make European financiers optimistic:
· As it was expected, more than a week ago after Jose Socrates’ resignation the Portuguese President dissolved the Parliament and announced elections, which will take place on June 5th. Consequently, considering the time needed to form a new cabinet of ministers, Portugal won’t be able to take any big-scale anti-crisis steps within the next 3-4 months.
· In 2010 the budget deficit reached 8,6% of the GDP.
· In 2010 the Portuguese sovereign debt reached 82,4% of the GDP. By now the debt has grown up to 92,4%.
· According to the forecast made by Fitch Ratings, by the end of 2011 the budget deficit will significantly exceed the 4.6% limit because of the political crisis. The current long-term credit rating of Portugal is the lowest value suitable for attracting foreign investors.
· Portugal’s 10-year T-bond yield hit a record (8.4%). Irish and Greek T-bond yield reached the same level when the countries addressed the EU and the IMF for financial aid.
· This month Portugal is obliged to pay back €4.5B and €2B in June.
Everything hints that Portugal will probably address the international financial institutions, becoming the 3rd EU member (after Ireland and Greece) asking for financial aid in order to avoid default. According to analysts’ calculations, Portugal will need €80-100B.
MigBank analysts note that in reality the EU has been supporting Portugal for a long time. Last year it spent €20B on Portuguese bonds.
The Belgian Minister of Finance confirms that Portugal will get the required financial aid form the EU if the Portuguese authorities officially ask for it.
Ireland needs extra €24B. What for?
Last year Ireland received €24B from the IMF and ECB. However the recent stress tests of the country’s 4 biggest banks resulted in unpleasant results:
· Patrick Honohan, Governor of the Central Bank of Ireland, said that in order to support the bank reserves and cover for the bad debt losses Ireland would need extra €24B.
· Allied Irish Banks, which is Ireland’s biggest bank, needs €13.3B (it has already got €5.3B), Bank of Ireland (the 2nd biggest bank) and Irish Life & Permanent need €5.2B each. EBS Building Society needs €1.5B.
· The Irish government has already poured into the national banks over €46B and repurchased their debts to the amount of €30B. 3 major banks were nationalized. Numerous experts think that Bank of Ireland and Irish Life and Permanent will be nationalized as well.
More than 50% of the experts interviewed by the ECB assume that the probability of a default in Ireland is very high.
Greece: Is there default ?
Greece has got the biggest financial aid form the international financial institutions, €110B. However, most experts expect the country to default:
· Greece received the financial aid from the ECB and IMF under tough conditions implying austerity measures aimed at reducing the budget deficit. However the Greek government seems to be a weak anti-crisis manager. The authorities may get extra €50B from selling public lands but they are afraid to take this unpopular step under the pressure of mass protests.
· Greece’s budget deficit is 12.5% of the national GDP, which is 4 times as high as the required limit introduced by the EU. Even after all the implemented austerity measures, in 2012 the Greek governments is planning to reduce the budget deficit only down to 9.1%.
· The Greek sovereign debt is 135% of the GDP.
· According to Joaquín Almunia, Vice-President of the European Commission, Greece won’t become bankrupt. It is interesting that Standard &Poor’s still doesn’t lower Greece’s credit ratings.
experts assume that the EU and ECB will do everything to help Greece and Ireland avoid default as the consequences may be devastating for the Euro currency. German banks have already lent over €500B to Greece, Ireland, Spain and Italy while the bankruptcy mechanism is still not developed. It is difficult to say how the German and other EU banks can force the borrowers to pay back.
Some experts say there is a way to save the Euro currency – to exclude the “defaulters” from the Euro zone.
Nevertheless, the news from Portugal and Ireland has had almost no impact on EURUSD. Traders are waiting for the ECB to toughen its monetary policy as the inflation rate in the Euro zone reached 2.6% in March.
Euro:
Experts of the Department of studying Masterforex-V trading system note that breaking above 1.4276, with a full-grown bullish FZR, will continue the uptrend in the form of wave C of Daily form the Reversal Point (RP) at 1.3432. If the price breaks through the MF pivot and sloping channel around 1.4060, the mentioned wave C of Daily will be completed.
and Market Leader offer you to participate in a survey by answering the following question at the forum for traders and investors.
Will Ireland, Greece and Portugal default on their debts?
· Yes, the will. Or at least one of them will.
· No, they won’t. The EU just won’t let it happen.
