Could the collapse of Portugal’s government reignite the Eurozone debt crisis?
Chris Bailey, European strategist at Raymond James, says Yes.
So far this year, the Eurozone has avoided significant region-wide volatility as spill overs from events in Greece have not sustainably infected other countries or markets. But the still inconclusive outcome from Portugal’s General Election does not auger well.
If the only viable government is one rhetorically anti-austerity, then risks are rising. Portugal – unlike Greece – has been a poster child for adherence to demands from Brussels and Frankfurt for the control of fiscal deficits.
That the electorate has not sufficiently backed the political parties that implemented such policies is noteworthy, and will inspire similar groups across Europe to redouble their efforts.
As always, the bond markets are the first indicator of any upcoming problem, and the sharp sell-off in Portuguese government debt over recent days is the first signal of potentially volatile times ahead.
The next stage to watch for? The upcoming Spanish election before the end of the year: political angst and higher bond yields have the clear potential to have a negative pincer movement impact on the Eurozone economy into 2016.
Ruth Lea, economic adviser to the Arbuthnot Banking Group, says No.
Granted, October’s General Election saw a public backlash against the austerity measures. And granted, the centre-right government has collapsed and is expected to be replaced by a less fiscally austere Socialist-led government, supported by the radical Left Bloc and the Communist Party.
But, according to Mario Centeno, expected to be Portugal’s next finance minister, fiscal discipline will be maintained, albeit on a less arduous path.
Centeno envisages cutting the budget deficit-GDP ratio from 3 per cent in 2015 to 1.5 per cent by 2019 (hardly the act of a loose-spending ideologue), rather than to 0.2 per cent by 2019, as agreed between the outgoing government and Brussels.
Brussels will probably suck its teeth, but it is unlikely to reject Centeno’s proposals and the Eurozone debt crisis is unlikely to be reignited.
This isn’t to say all is well in the Eurozone or indeed in Portugal, but the Eurozone is “tenacious of life” and the immiseration of much of the euro area will continue for the foreseeable future.