Portugal is relatively non-critical in the inner workings of Europe. The country’s Gross Domestic Product (GDP) was the 36th largest in the world, just ahead of Ireland (another receiver of emergency funds) and behind the powerhouse Columbia, according to the World Bank.
Portugal is paying out an enormous 7.9% on its 10-year bond, which cannot be good. Nevertheless, the high rate is required to attract investors due to the high risk of holding Portuguese bonds.
Portugal’s Prime Minister Jose Socrates recently resigned after failing to get an austerity program approved. The remaining government is scrambling to find solutions to the mounting issues.
The problem is that Portugal is broke and cannot continue to pay out high-yielding bonds. The country will need to reorganize its financial structure and try to renew its economy and finances. Standard & Poor’s cut its view on the country’s five biggest banks.
Yet, just like Greece and Ireland before it, Portugal has approached the European Union (EU) seeking emergency loans to stay afloat. I’m not surprised at all. I fully expect more countries to scramble for funds, especially if Europe continues to see flat economic growth.
Even so, the European Central Bank decided to increase its key interest rates by 25 basis points to 1.25% in the 17-country Eurozone in response to starving inflation. This may not be the best timing, but the region is set on stomping down inflation regardless of the economic situation.
My investment advice for you is not to ignore the massive debt and deficit problems plaguing Europe. And don’t forget the $14.0- trillion debt load in this country.
The reality is that, without economic renewal in Europe and other foreign markets, we cannot expect a sustainable recovery. This is basic economic analysis. The need to continue to fund the high-risk countries will take away from the focus on growing the Eurozone.
And, while Portugal is not a significant player in the EU, weakness there could impact other countries, including neighbor Spain, which also needs to raise more capital. This latter country remains in a risky position. The problem is that Spain is a major global player, with its economy the ninth largest in the world. Spain came out and said that it does not need any funds, at least for now. But if the growth in Europe remains stagnant, you never know.
I feel that Europe may continue to underperform the global markets in 2010 and 2011.
The last thing the EU wants is weak members dragging the member group down, especially at a time when the region is trying to rebound from the global recession.
The global economies are interlinked and problems in one region of the world will have a domino effect on countries and regions thousands of miles away…including us.
The bottom line is that sustained growth in America cannot be achieved without renewal in the major world economies, which is why Europe and the situation in Portugal should not be ignored. I know it is only Portugal, but could it be the start of something worse to come?