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A new crisis is coming from Europe
Material posted: Publication date: 04-07-2013

For Europe it was a second loud Wake-up call. In the already troubled Portugal political crisis rages. July 1, resigned Finance Minister Vitor Gaspar, apparently, lost faith in the efficacy of unpopular austerity programs, which had previously been agreed upon with the Eurozone and the International monetary Fund.

Tuesday, July 2, his example was followed by foreign Minister Paulo Portas. The resignation of two Ministers led to a threat of local collapse of the ruling coalition and triggered a fall in the value of Portuguese assets in the markets. According to the Portuguese media, in the near future several other members of the Cabinet of Ministers can declare the resignation.

As a result of Wednesday, 3 July, the yield on 10-year Portugal government bonds on the secondary market jumped more than 150 b.p. and exceeded 8%, Reuters reports citing data from Tradeweb. The growth rates of the Portuguese sovereign debt due to massive sale of Portuguese securities amid the political crisis in the country. The main index of the Lisbon stock exchange 20 PSI into the environment fell more than 6%, the largest drop showed Portuguese banks quotes - over 10%.

As the analyst of Allianz Investments Ariel Cherny, in the case of the collapse of the ruling coalition in Portugal will be new elections, and the continuation of reforms and policies aimed at the rapid reduction of the budget deficit, will be called into question. As a result, the yield on Portuguese bonds rose sharply as investors once again had doubts about the reliability of investing in the securities of the peripheral countries of the Eurozone as a whole, emphasizes the expert.

Analyst IFK "solid" Elsa Bikchurin notes that in addition to economic problems in a growing negative sentiment was influenced by the political instability in Portugal. Some leaders of the United Europe has already expressed concern about the problems, but news about the crisis yet. On Wednesday the people's party of Portugal, whose representatives left the government, will hold Congress, and possibly it will be formulated a solution. According to experts, the exit of the party from the government coalition will lead to the fact that the government cannot secure a majority in Parliament for the adoption of the reforms that the country needs to spend to get financial assistance. Growing concerns about a possible postponement of reforms in Portugal led to the fact that at the opening of trading, the yield on 10-year bonds rose to 7,82%, and for the first time since 28 December 2012. has exceeded 7%.

Sale of Portuguese bonds returned to the markets fears of a renewed crisis in Europe. While the situation is not critical, and can quickly adjust. However, the inaction or procrastination of finding sources of assistance can lead to disaster. At the moment the ECB has at least two reserves in order to lighten the tension in Portugal. The first one is successful, according to the head of the ECB, the OMT program, serving as essentially a tool of monetization of the debt. The second reserve - the European stability mechanism ESM.

However, experts Danske Bank does not think that the program OMT will be used in the moment to buy Portuguese bonds. "To be eligible to participate in the OMT, a country must regain access to the bond market. Although Portugal twice this year to print money, this is not enough to qualify Portugal as eligible for OMT", - experts say.

However, they do not exclude the possibility of activation of the secondary market Secondary Market Support Facility (SMSF) within the framework of the ESM to buy Portuguese bonds. "The reserve still has not been used. Portugal will qualify for purchase by secondary market ESM as a country, already in progress adjustment program. However, from the point of view of financing Portugal does not require access to this market in the current year", - emphasized in Danske Bank.

According to analysts Commerzbank, the government of Portugal was plunged into a deep crisis. According to media reports, at least two Ministers intend to withdraw from the government. This week the President will hold talks with representatives of all parties. The most likely scenario for saving the ruling coalition. If fresh election will be held, the implementation of reforms and consolidation of public finances will be postponed. The program of support of economy is threatening to go off the tracks. However, experts Commerzbank't think that the crisis in Portugal spreads to Spain or Italy.

And for good reason. Italy has a finger in the pie ever since the opening of fraud with the size of the budget deficit. We will remind, recently around Italy there was a scandal after the Financial Times citing a secret report of the Ministry of Finance of Italy reported that the government might record huge losses on derivative contracts - worth up to 8 billion euros.

Specific information on banks and contracts in the materials did not contain, however, the experts immediately began to talk about what these contracts were almost certainly signed at the time of preparing Italy to join the Euro zone in the late 1990-ies.

For joining the Eurozone Italy should have been to withstand the strict criteria of the Maastricht Treaty that requires Euro zone countries to have budget deficits less than 3% of GDP, and in Italy shortly before the accession to the Euro area it amounted to 7.7% of GDP. However, a couple of years the deficit inexplicably dropped even below the required level, to 2.7% of GDP, which was the most powerful and sharp deficit reduction among all the countries that initially entered the monetary Union. Surprisingly, the process of reducing the budget deficit were not accompanied by equally powerful sequestration of expenditures or increase taxes to increase revenue of the Treasury. This has forced economists to doubt, whether there had been improvement budget, or Italy (like Greece) have resorted to the falsification of budget indicators. In the fall of 2009. The European Commission is caught Greece on the manipulation of data on public finances, the budget and accused of obstructing the collection of objective statistics. What happened, everybody remembers.

Trying to find out the cause of Italy losses on derivatives, the FT reporters found that in the 1990s the Italian authorities had concluded with a number of investment banks contracts on derivative instruments (swaps and options interest rate swaps) to reduce payments on the public debt, transferring some of them to later years. However, most of the contracts were restructured at the time of the debt crisis in the first half of 2012. unfavorable for Italy.

If the assumption of falsification is confirmed, this may lead to second wave of crisis in Europe. And here the first thing is to assess the extent of cheating, because by the end of 2012. Italy showed the world the figure of budget deficit to 3%, while all other countries of the Eurozone (except for Germany) the order went beyond that. How far from prosperous, the country manages to keep this indicator, is unclear. Thus, the Italian budget the iceberg might be huge and drown the whole of Europe.

Among other things, Italy is brewing a political crisis. According to E. Baccarini, here the Prime Minister held an emergency Cabinet meeting after the party "Civic choice" has threatened to withdraw from the government coalition because of slow reform.

The above-mentioned Greece and even may lose the next credit tranche, if you do not impose your findings to the creditors. Greece needs to demonstrate to lenders the ability to fulfill the conditions required for the provision of international assistance to receive the next financial tranche. Otherwise, international lenders may freeze payment of the credit tranche for three months. This was announced on Wednesday, one of the European diplomats, after yesterday sources reported that the creditors are dissatisfied with the lack of progress Greece in reforming the public sector, reports Reuters. In particular, we are talking about taxation, the collection of customs duties and health care. "We came to an agreement that Greece should speak before the meeting of the Eurogroup on 8 July. Therefore, she again needs to present their achievements 5 July," said one of the representatives of the EU. Dealing with a credit tranche in the amount of 8.1 billion euros.

It would seem that the puzzles external well-being of Europe and the optimistic forecasts of European officials about the beginning of the recovery of the Eurozone economy in the second half of 2013. risk to crumble overnight. Gong crisis in Europe threatening buzzing under the blows of the political problems of two countries and yet unsolved mysteries of deficit budgets.


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