Another one bites the dust - Outside View by Asad Dossani

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Another one bites the dust
Apr 11, 2011

The Eurozone debt crisis is back in the news. Over the past few weeks, the headlines have consisted of various Portuguese government ministers emphasizing that they do not need a bailout. Just like the Greeks and the Irish claimed that they did not need any assistance, so too did the Portuguese. And like their predecessors, they ended up asking for a bailout anyway.

Most of us know not to trust politicians. The difference between what these government ministers say and what they actually do could not be greater. The market was not fooled though. Portuguese bonds yields have remained stubbornly high in anticipation that a bailout would be requested.

Earlier this week, the European Central Bank (ECB) became the first of the major Western economies to raise interest rates. In a widely anticipated move, the bank raised interest rates from 1% to 1.25%, still at a very low level. The stated reason for the rate rise was increasing inflationary pressures. As the ECBís mandate is price stability, they had to raise rates despite the problems higher interest rates will cause for indebted Eurozone nations.

The European countries that have been strong economic performers (i.e. Germany) would benefit from a rate rise. Inflationary pressures would be reduced and growth would continue without the economy overheating. For the heavily indebted countries, this rate rise could not have come at a worse time.

Most of the indebted countries are heavily reliant on floating rate debt. As a result, any increases in the interest rate hurts their economy directly as their interest payments go up.

In the short term, Portugal has the difficult task of negotiating a bailout package. A month ago, the government tried to implement austerity measures but was unable to. The EU finance ministers will be expecting Portugal to demonstrate that they are taking concrete steps to reduce their debt levels, and this is likely to be difficult from a political perspective.

Portugal is expected to ask for approximately 80 billion euros over a three-year period. The EU and the IMF will jointly finance this. A certain amount is expected to be used to stabilizing the banks. In return, they will be expected to implement austerity measures and privatize many state-owned assets.

It remains to be seen whether or not these bailouts will work. Effectively, these bailouts are simply new loans to pay off old ones, except that these loans are provided by the EU and IMF instead of private investors. Chances are that these countries will have trouble in a couple of years time when it comes to paying these back. Using one credit card to pay off another is not a very sensible strategy.

On a final note, since Portugal asked for a bailout, there has been renewed speculation about Spainís financial position. EU minister Olli Rehn, when asked about Spain, was confident that Spain would not need a bailout. As I said before, most of us know not to trust politicians.

Disclosure: I do not hold the currency/commodity discussed in this report.

Asad is an Economics Graduate from The London School of Economics who has also been a part of the currency derivatives team of Deutsche Bank in London. Currently pursuing his PhD at the University of California San Diego where he's researching on Algorithmic Trading Strategies, Asad will be your direct line for answers to all the questions you might have on short-term investing. A part of the Equitymaster Team since 2010, Asad has been sharing his knowledge on short term trading strategies with our valued readers, like you, through our various services. In fact, at the last count, his weekly newsletter, Profit Hunter, was being delivered to more than 100,000 smart traders across the world!


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Another one bites the dust". Click here!


More Views on News

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

Aug 16, 2019

Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

3 Rebirth of India Opportunities Are Racing Ahead in These Gloomy Times... podcast (Views On News)

Jun 28, 2019

Tanushree Banerjee shares an update on the Rebirth of India and reveals her top 3 trends...

How to Separate Fact from Fiction (Vivek Kaul's Diary)

Feb 5, 2019

Vern Gowdie talks about what happens when there's too much debt in the system.

More Views on News

Most Popular

Protect Your Wealth from Fund Managers (Fast Profits Daily)

May 14, 2020

Do you know how much you are paying in fees to your mutual fund? In this video I'll share with you my views.

Of India's 20 Trillion Stimulus Package and the Swoosh Index for a Swoosh Recovery (Profit Hunter)

May 13, 2020

For India's rapid economic recovery, hopping on to the Swoosh index is a must.

How Commodity Prices Tell You When Stocks Will Go Up (Fast Profits Daily)

May 20, 2020

Commodity prices often provide clues to big moves in stock markets. In today's video, I'll explain this link.

This 'Essential Product' Smallcap is a Must Have for a 'Covid-19' Immune Portfolio (Profit Hunter)

May 19, 2020

This smallcap company needs no stimulus measures to do well in the long term.

Why Buffet - and you - should study Quantum Liquid Fund (The Honest Truth)

May 14, 2020

Ajit Dayal on how Quantum Liquid Fund and Warren Buffett have similar investing styles.


How to Trade the
Coronavirus Crash

Coronavirus Crash
Get this special report, authored by Equitymaster's top analysts, now.
We will never sell or rent your email id.
Please read our Terms