Another Euro Crisis or Not?

The new concerns over Greece's debt problem and the political crisis in Portugal have MoneyShow's Jim Jubak assessing the chances of another round of Euro debt crisis.

Is the Euro debt crisis moving back toward crisis again?  Well you’ve got a choice. You can say, oh there are problems in Portugal and Greece but, hey, those are small countries on the periphery of the Eurozone and they really don’t count. Or you can say, oh my goodness Portugal and Greece, yes they are indeed small countries but they’re kind of canaries in the mine shaft, there are signals that you were looking at problems coming down the road for Italy and Spain, and those countries would really count. 

So here’s what’s happened, we’ve had a major political crisis about austerity in Portugal.  We’ve had the resignation of the finance minister and then the minister for foreign affairs, which has brought the government in to an area of crisis.  Especially important was the resignation of the minister for foreign affairs because he’s the head of the junior party in the coalition government.  If they decided not just to resign but actually to withdraw support from the government, the government falls, the prime minister would have to hold elections about two years early, and it’s not clear that any new government coming in would be as committed to austerity as the current government. 

The problem with austerity of course is that you’ve got 18% unemployment in Portugal, no sign that the economy is really bottoming, and with this political crisis the yield on 10-year Portuguese bonds jumped from 6.5% on July 1, to 8% on July 3.  That’s not sustainable, that’s not something that the market is going to allow Portugal to get away with. It’s not something that the government can balance its budget on. It’s not something, most importantly, that Portugal can then go back into the public markets in 2014, which is the plan. 

Something’s got to give. Either there has to be more confidence, rates have to come down, the ECB has to say something bringing rates down, or indeed we’re moving toward a situation where Portugal is going to create a crisis that would then just seep over the border into Spain and Italy.  In the short-term at least the drop in Portuguese stocks on the 3rd was about 5.2%, the German DAX went down only 1%, the French Index about 1.1%, so at the moment there’s a sense that Portugal doesn’t count. 

You switch to the other end of the Eurozone to Greece where we’ve got the Troika, and that’s the European Central Bank, the International Monetary Fund, and the European Commission, these are the guys who go in and say oh Greece is up to plan so therefore we will release their money, or they say Greece is not up to plan so they’re not going to get the next tranche of their bailout money.  Right now they’re saying oh Greece is not following through on plan, it hasn’t fired as many government workers, it hasn’t privatized as quickly as possible, and we’re not going to give it all its money. 

This is exactly what people were expecting that Greece would not be able to meet their commitments.  Again, it’s just Greece so we’re not worried about that, but we’re seeing the same problems in France and Italy where promises of reform are not coming true, not being delivered as promised, not on the scheduled promised, and in the case of France you’re getting incredible pushback in fact from the French Government against the European Commission, where the European Commission gave France another two years to meet it’s deadline of getting it’s budget deficit down to 3% of GDP, and said, this is bad politics on the part of Brussels, said oh and the French have to do XYZ. 

The French basically have said you know we’re a sovereign country we don’t care what you say, and in fact if you dare tell us we’re going to thumb our little _____ noses at you, so you’ve got a crisis there, but it’s the whole thing together looks like a replay of what this has always been, which is a political crisis as governments find it impossible to impose this amount of austerity on their populations for as long as this crisis requires.  We’ve got austerity fatigue and what comes next is really a good question as the summer sort of heats up as we head toward German elections in September.