Poor old Portugal.
Christmas delivered a brief respite. But it's a long 12 months until December rolls around again.
And the markets seem convinced that way before then, Portugal will have held out its hand for a bail-out from the European Union, the International Monetary Fund, or whoever else holds all the money these days.
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What's happening to Portugal?
Sorry to return to the subject of Europe again so soon, but Portugal is occupying all the headlines today.
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The most immediate worry is that it is trying to borrow more money from the markets via a bond auction on Wednesday. It will be selling ten-year government bonds. It's the first of the most indebted eurozone countries to try to sell its debt this year.
The problem isn't so much that the auction might fail. The real problem, as Toby Nagle of Baring Asset Management tells Bloomberg, is the rate at which Portugal has to borrow.
As Bloomberg notes, the yield on Portugal's existing ten-year bonds has been driven up over 7% on ten of the last 62 days (in other words, the price of ten-year bonds has fallen). A year ago, it cost Portugal just 4% to borrow money for ten years.
Why is that significant? Because 7% seems to be the magic number at which countries are destined for a bail-out. "Greece needed a rescue within 17 days of its ten-year yield breaching 7%... while Ireland lasted less than a month after it cracked that level in October."
Portugal's problem isn't Greece-style profligacy. Public sector debt was fine before the crisis hit. Portugal's real problem is that its economy is stagnant and its private sector is over-borrowed. As with so many other global economies, years of overly-lenient interest rates allowed consumers to party at a time when their economy should really have been reformed to improve productivity growth.
The problem is that if Portugal is bailed out, it reduces the amount of money left over in Europe's big bail-out fund for other troubled countries. And there are at least two of those lining up. There's Belgium, which has a large national debt and no government to tackle it. And then there's Spain, which is trying to raise money from the market later this week too. The yield on ten-year Spanish government bonds is around 5.5%.
The good news for the eurozone is that both Japan and China have weighed in to say that they will support Europe. Japan has said it will buy bonds issued by the bail-out funds, while China has said it will keep buying Spanish debt.
Europe's basic problem
But the basic problem is that Europe still hasn't managed to get ahead of the crisis. Everyone can see that the bail-out fund as it stands is too small to back every potential troubled eurozone country.
Either the fund is expanded, or Europe starts issuing eurozone-wide bonds. The Germans in particular aren't especially keen on either option because it means they are subsidising the weaker countries. And the third option that the European Central Bank effectively prints money to buy eurozone government debt certainly isn't on the German agenda.
The trouble is, says Lex in the FT, that "after Portugal's inevitable rescue, the eurozone will have run out of easy options".
One eurozone "senior official" told Reuters that "the real battle will be the battle of Spain but there I think we have much higher chances of success". It's possible that Spain might not need a bail-out. The country is trying to cut public spending and reform pensions.
But the country's banking sector is exposed to both Portuguese debt and its own burst property bubble. And it's this that the market is focusing on. "It is not so much about the sovereign, now it is really about banks," says Gilles Moec at Deutsche Bank. The concern is that, although most of Spain's regional banks (cajas) passed the stress tests last year, so did the Irish banks. And that has of course, shot any credibility that the stress tests had to pieces.
And beyond Spain, as James Mackintosh adds in the FT, "the real danger is what happens to French and German banks if Spain cannot endure austerity."
For now, there's still a sense that the most likely outcome here is that the eurozone muddles through. The German taxpayer one way or another will end up shelling out to defend the euro, and we won't see any catastrophes. It's possible.
But you have to remember that every single one of these countries from those doing the bailing out to those who are being bailed out has at least a proportion of voters who see Europe as the source of all their problems. If they get fed up with austerity, then it's an easy selling point for opposition parties to campaign on.
What does it mean for investors?
Really, the eurozone crisis is unfolding in a similar way to last year. We can expect to see panic followed by fudge, followed again by panic. That will be reflected in a volatile euro exchange rate.
I suspect that, for now, the euro is headed lower. UBS reckons the single currency is set to fall to $1.2450 against the dollar. If you're interested in playing it then you could sign up for our free MoneyWeek Trader email, which discusses various tactics to help you spread bet successfully. But please do understand that spread betting is risky (you can lose far more than your initial stake), and currency markets are volatile, so it's not something to stake your pension money on.
On a more positive note, fragile confidence about the eurozone is likely to mean there are plenty of opportunities in the coming year as solid companies are undeservedly sold off. We'll be looking at decent eurozone plays in the coming months in MoneyWeek magazine. If you're not already a subscriber, subscribe to MoneyWeek magazine.
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