Portuguese, Irish Activity May Affect Relevant ETFs

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Includes: CUT, EIRL, IEV, VGK
by: Tom Lydon

The European Union has once again been thrown into confusion as Portugal’s government comes to a standstill after the breakdown in parliament talks. European ETFs could be affected as the situation develops and the issue is addressed.

Portugal’s parliament rejected the new government austerity plan on Wednesday, which pushed Prime Minister José Sócrates to resign his position, report Patricia Kowsmann and Jeffrey T. Lewis for The Wall Street Journal. The failure to pass the measure threatens to push the government’s borrowing costs over into unaffordable levels and force a potential bailout.

If Portugal does take a bailout, tougher austerity measures than the ones Mr. Sócrates proposed may be forced upon the country. Portugal has already taken steps to discuss a possible bailout plan with the IMF.

The European Union will have enough funds to handle any financing needs Portugal could face in the next couple of years. However, as it is starting to look like Portugal might lose access to market financing, Spain, the euro zone’s fourth-largest economy, is garnering greater scrutiny over its weak banking system.

The government now projects an economic contraction of 0.9% for the year, a downward revision from its previous estimate of 0.2% growth.

There is currently no Portugal country-specific ETF available. Guggenheim Timber (NYSEARCA:CUT), an ETF that covers the wood industry, has around 5% of its holdings in Portuguese companies. While the European ETFs may not have a lot of exposure directly in Portugal, there could be affects based on the economic situation of the Eurozone. Two ETFs to watch include:

  • Vanguard European ETF (NYSEARCA:VGK)
  • iShares S&P Europe 350 Index Fund (NYSEARCA:IEV)

Euro zone leaders were supposed to discuss strengthening economic governance in Brussels on Thrusday, but many of the issues have been postponed, including a decision on reducing the interest rates for the Irish bailout, according to RTE. The discussion on reducing the interest rate on the Irish bailout could continue, pending the completion of stress tests on Ireland’s banks. Irish two-year bond yields have surged to 10%, the highest levels since the crisis. This move comes after EU finance ministers yesterday agreed on a permanent rescue fund.

An ETF to watch in this case:

  • iShares MSCI Ireland (NYSEARCA:EIRL)

Max Chen contributed to this article.