Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Another one bites the dust - Outside View by Asad Dossani
Another one bites the dust

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

Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

Jul 25, 2017

Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

May 27, 2017

What happens when minority shareholders are short-changed in the normal course of business?

Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

Feb 15, 2017

PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

Aug 24, 2016

And here's your chance to claim a free copy of this book...

The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

Aug 12, 2016

And Why India's demographic dividend could turn out to be a doubtful debt...

More Views on News

Most Popular

Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

Aug 7, 2017

The data tells us quite a different story from the one the government is trying to project.

Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

Aug 4, 2017

The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

Aug 7, 2017

Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms