The dissolution of the Portuguese Parliament only served to hasten the downfall of Portuguese government bonds. 5 year yields are currently sitting at 8.3%. That’s not good amigos. The real story here is the broader effects on the Euro Zone and its currency. Curiously, as market confidence in Portugal deteriorates the Euro has remained stable, and quite high with a $1.40 handle. Why, you ask? There is a consensus that Portugal will more than likely accept a bailout funds of somewhere between €60-80 billion.
We have seen this movie before with Greece and Ireland and now Portugal. How many sequels will the EU authorities tolerate? Downgrades of sovereign debt by the big three crediting agencies (Standard & Poor, Fitch and Moody’s) to borderline junk status have forced the hand of government officials to accept bailout funds and their often unpopular austerity terms. The alternative – default – is not an option.
The measures put in place to broaden the European Financial Stability Facility are a step in the right direction to resolving this crisis. The fact that a course of action has been outlined has definitely limited the effects of speculation on the Euro. But we aren’t totally out of the woods yet. I read something in Forbes about growing political uncertainty in the creditor nations, not just the PIIGS seeking bailouts.
In particular, I worry about Germany, where Angela Merkel’s party faces a possible defeat in upcoming elections. The reason for the disapproval – you guessed it – the bailouts. What’s funny is that the two minority parties advocate an even more lenient requirement for nations seeking funds. Germany is by far the most influential of the creditor nations in the Euro Zone, and has too much invested in the Euro. That’s why I’m sticking to my previous position – this crisis will be averted.
Short term though, I think the Euro is toppy. I used HiddenLevers to find some plays that are inversely correlated to the Euro. Of course, the UltraShort Euro ProShares ETF (EUO) came up, with a Euro lever impact of -1.38. But I also found the Vanguard Financials ETF (VFH), with a Euro lever impact of -1.32 and KKR Financial Corporation (KFN), with a Euro lever impact of -1.94.