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First Greece, now Portugal – are we heading for another eurozone crisis?

While the Greek debt crisis rumbles on, Portugal may be the next country to fall out with Brussels. Matthew Partridge explains why, and what it all means for investors.

151112-portugal
Now Portugal is rebelling against austerity

Europe has fallen out of the headlines somewhat since the start of the year.

With the Sisyphean cycle of Greek electioneering out of the way, the hope was that the newly elected government would now be able to make enough progress to allow Brussels to release the bailout money.

Fat chance. The pace of Greek reform is moving too slowly for its creditors, who are delaying the release the first chunk of bailout cash.

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Meanwhile, the idea that Europe's uncompromising approach to Greece would deter other countries from making the same mistake' doesn't seem to be working.

Now an anti-austerity coalition is taking power in Portugal.

So are we heading for a fresh bout of euro panic?

Greece is annoying its creditors again surprise, surprise

Earlier this week, the Eurogroup (Greece's creditors) met to discuss Greece's progress. They're concerned by surprise, surprise the failure to pursue key reforms.

The most pressing issues are around Greece's banks. Greece's creditors think that stabilising the banking system should be Greece's first priority. But they also fear that the Greek banking sector has to be far more transparent and efficient. Otherwise any money given to them will simply be wasted.

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Then there are concerns over Greek attempts to change the rules on repossession. The new rules would allow anyone with a home worth less than €300,000 to remain in it, even if they were unable to pay their mortgage.

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Athens argues that these new rules are needed to stop banks from throwing a large number of people out onto the street. As well as causing social chaos, a fire-sale of homes would hit the housing market (not ideal for banks either).

Of course, there's also the argument that it removes the incentive for people to pay their mortgages, not to mention the general trickiness of valuing illiquid assets such as property.

In any case, as far as Greece's creditors are concerned, the rule would just increase the amount of bad debt on the banks' books, making their position even worse. So they've given Greece until next week to change the rules on banks, and to water down the repossession law.

If Greece doesn't comply, the creditors will simply refuse to pay out either the €2bn that Athens needs to keep going, or the €10bn promised to support the banks. This in turn could see Greece default on its debt, and the whole agreement unravelling.

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And even if that doesn't happen, this stand-off over banking reforms is having a knock-on effect on hopes for a longer term deal to resolve the crisis once and for all. Almost everyone agrees that Greece's current level of debt, at around 180% of GDP, is too high to ever be repaid. So logically, the Eurogroup will eventually have to write-off a chunk of the debt if Greece is to be rebooted'.

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But the perception that Athens is something of an intransigent borrower is hardly conducive to agreeing any such deal.

Klaus Regling, who runs the bailout fund, has repeatedly said that a nominal haircut is "certainly not on the cards". Some form of debt relief could happen in the form of lower interest rates and longer maturities, he said, but nothing as substantial as many are now calling for. And it would depend on Greece fully implementing its reforms.

Now Portugal is getting rebellious

It all stems from Portgual's recent inconclusive election. The main pro-austerity party won the largest number of votes and seats. But it fell short of a majority. So the three opposition parties united to form an anti-austerity coalition, and now they have voted down the government.

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This could lead to a major row with Brussels. Like Syriza in Greece, the parties in question have no desire to leave the EU. But again like Syriza they plan to increase public spending substantially. That in turn is almost certain to mean running a higher deficit (a bigger gap between spending and tax revenues).

As Capital Economics points out, while Portugal isn't currently in a bailout scheme, investors have already started to worry, pushing the interest rate on government debt up. Failure to meet the deficit targets could also mean Portugal facing fines from the European Commission.

And, of course, it all adds to the general uncertainty. As one Barclays analyst told the FT: "Minority governments in Portugal tend not to last their full term, and we do not rule out the possibility that Portugal may need to hold elections again within a year".

It's all going to be left to Draghi

As we've said before, Draghi's press conference at the last ECB meeting suggests that he already needs little convincing of the need to boost the money supply. We could see both interest rates falling deep into negative territory, and even more money printing (quantitative easing) by the ECB.

The forex markets seem to have priced further easing in, with the euro falling to a six-month low. However, European shares still look cheap. For the adventurous, Greece is especially so you can buy in using the Paris-listedLyxor Athens ETF(Paris: GRE).

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