Tags: Chandler | Portugal | domino | Europe

Marc Chandler: Portugal’s the Next Domino in Europe

By    |   Thursday, 23 Feb 2012 08:03 AM

The agreement on a second bailout for Greece buys the eurozone time, but its debt problems haven’t been erased, says Marc Chandler, head of currency strategy for Brown Brothers Harriman.

"This probably forestalls Spain and Italy from having worse problems. They put the firewall around them,” he tells Yahoo.

“But we’re going to return to this issue whether it’s one year down the road or two. And Portugal is the next one we’re going to have to watch.”

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The reaction of European bond markets to the bailout accord shows Portugal is the weak link, Chandler says. Italian and Spanish bond prices rose afterward, but Portuguese bonds plummeted.

The Italian 10-year government bond has a yield of 5.44 percent, compared to 5.11 percent for Spain and 12.43 percent for Portugal.

Portuguese interest rates are too high, despite the European Central Bank’s easing, Chandler says. “That means a weaker economy.”

It also means it’s more difficult for Portugal to reach the debt-to-GDP targets that everyone is focused on, because “the denominator – GDP – is falling faster under the weight of austerity,” Chandler says.

He and others say creditors of indebted European governments are putting too much focus on austerity. “It’s similar to medieval doctors taking blood from weak patients,” Chandler says.

Many agree that the crisis isn’t finished. “I don’t want to be a Cassandra, but the idea that it’s over is an illusion,” Harvard economist Kenneth Rogoff tells The New York Times.

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2012-03-23
Thursday, 23 Feb 2012 08:03 AM
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