Euro zone: new old concerns
Euro zone’s problems returned into the limelight after several months of relative calm. The recent developments are showing the euro zone’s troubled economies may need more financial help. Last summer Mario Draghi promised to do "whatever it takes" to save the euro, but the fact remains: euro zone is still in trouble.
Political uncertainty in Portugal threatens a new financial crisis: last Wednesday Portuguese bond yields rose sharply on the back of ministers’ resignations. The spike in borrowing costs above 8% is raising concerns on whether the country will need a second bail-out. The government needs to raise 16.3B euros from markets for 2014, what will be very difficult if political uncertainty persists.
Many economists doubt that the Cyprus 10B euros bail-out will be enough to support the economy: given the economic downturn and no progress in bank restructuring, the bailout's estimate for economic contraction of 8.7% in 2013 looks far too optimistic.
As for Greece, on Monday the Eurogroup ministers approved the next bailout tranche for the country. However, Greece will soon return into question since it is unlikely to have 12 months of forward financing needed to get the necessary support from the International Monetary Fund for further releases of rescue funds.
What’s more, the US Fed is widely expected to slow its QE program in September, depriving the European debt markets of cheap dollar liquidity. Increased uncertainty may bring us an eventful autumn, heated by the German elections in September.