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CREDIT COMMENTARY
Apr 08, 2013
Thatcher's euro prophecy
The passing of former Prime Minister Margaret Thatcher is dominateding UK headlines today, and pushing economic matters into the background.
Thatcher memorably called the euro "perhaps the greatest folly of the modern era", a view that some would argue has been borne out by events in recent years. She went on to say that poorer countries would lose out from the euro because it would "devastate their inefficient economies".
Portugal has certainly suffered since the debt crisis started, though it is the medicine being applied to the economy that is doing the damage.
The sovereign's CDS widened 12bps to 425bps after the country's constitutional court blocked four out of nine austerity measures proposed by the government.
This leaves a major hole in the 2013 budget, a problem that the government plans to address through further spending cuts. Portugal has little choice but to stick to the current budget target, as it is a precondition for extending the maturity of the EU's bailout loans.
However, multiple tax rises and spending cuts have inflicted serious pain on the Portuguese people, and the court ruling will probably strengthen the hand of the anti-austerity opposition. But it should also be remembered that Portugal's spreads, while at their widest since January 1, are nowhere near the 1,200bps seen last summer. Portugal has the support of the troika and it would take a major political upheaval for this to change.
Portugal's problems had little impact on the broader credit markets, which continued to rally thanks to the intervention of the Bank of Japan last week. The Markit iTraxx Europe was just over 1.5bps tighter at 117bps, with high-beta banks leading the way.
It is a relatively quiet week on the economic data front, so the focus may turn to the start of the US earnings season. Alcoa is the first to report after the US bell today. Earnings surprises typically don't have a major impact on spread direction, but still have the potential to influence sentiment.
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