Euro Falls as Portugal Looks More Like New Greece |
The euro is in retreat on Wednesday, as Portugal begins to look a lot more like Greece. At the moment, the euro lost 0.48% of its value against the U.S. dollar to trade around $1.4360. At the same time, the European currency surrendered even more value to the Japanese yen, falling 0.63% to ¥116.22.
The euro was hit hard as Moody's downgraded Portugal's debt to junk. The rating agency cited concerns that Portugal will find it harder to borrow money in open markets and will be, therefore, forced to ask for another bailout. Portugal was the third Eurozone member to be forced to ask for a bailout, after Greece and Ireland. Its government was forced to resign after it was unable to pass through the parliament another round of austerity cuts. It seems as if Moody's remains unconvinced that the new center-right government is more able and willing to push through difficult and unpopular reforms it views as essential in restoring market confidence in the troubled country.
It seems as if the Greek scenario is repeating itself. With the new credit rating set at junk, it seems inevitable that the borrowing costs for Portugal are set to rise. Depending on the size of borrowing costs, it might not take long before Portugal finds itself unable to borrow money in open markets, just like Greece was prior to the second bailout, and demand more help from other Eurozone members. So far, Fitch and S&P still maintain their rating on Portugal above junk status. It remains to be seen for how long, however.
Markets might be increasingly worried about Spain as well. If Portugal is forced to ask for another bailout, the pressure will mount on Spain to ask for its first bailout. Domino effect will then very likely keep rolling to push Italy and Belgium into debt crisis. Bailing out Spain would be a difficult pill to swallow for the Europeans, however, as Spain is twice the size of Greece, Portugal and Ireland combined.
Investors will be even more worried about Spain following today's industrial production data. According to the statistical office INE, Spain's industrial production declined by 0.4% in May, compared to a year earlier. It is a significant improvement from April's -1.5%, but analysts had expected the May value to be the same as the year before. This represent the third month in a row of falling industrial production. The Spanish recovery remains fragile, it seems, which will hurt the government's tax revenues and its plans to cut its budget deficit.
To make matters worse for Portugal and Spain, there is a mounting opposition to more bailouts in the Eurozone center, and nowhere as much as in Germany. A number of dissidents have appealed to Germany's Constitutional Court, the highest legal instance in the country, that the bailouts for troubled Eurozone members violates certain constitutional provisions. German Chancellor Angela Merkel has already suffered election setbacks due to Germany's unpopular participation in various bailouts. It might be the case that in order for Germany to join the next bailout, Chancellor Merkel might demand even more sacrifice from the debt ridden countries. This approach might backfire and cause anarchy in the bailout-seeking countries, much like in Greece.
Action Items
Bullish: There is just too much at stake for Germany and other members of the Eurozone to let Greece, Portugal or any other country leave the Eurozone. As a result, the Eurozone will defend its weakest members until the last dime. Traders who think the Eurozone will be able to find a solution for the debt crisis in the Eurozone will be interested in:
• CurrencyShares Euro Trust ETF (NYSE: FXE) is a long euro play. FXE is likely to rise if the euro appreciates.
• Market Vectors Double Long Euro ETN (NYSE: URR) is another long euro play. URR is likely to rise more than FXE, however, should the euro appreciate.
Bearish: The situation in the Eurozone does not look good. Bailouts are becoming increasingly unpopular in both the borrowing and lending countries.
About the author: Benzinga
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