ince ECB President Mario Draghi uttered those now famous words in July 2012 to do "whatever it takes to preserve the euro and believe me it will be enough" a lot of the fear about an imminent break-up of the euro area dissipated, which in turn relieved a lot of the pressure on borrowing costs for the worst affected countries.
In the time that has elapsed since Draghi uttered those words, capital has started to flow back into the euro area and confidence has slowly returned, and in the process lulled markets and investors into a false sense of security.
This is because none of the underlying problems that served to create the crisis have been dealt with,
namely the sovereign debt feedback loop between banks and the governments they fund.
The crisis in Portugal is a direct consequence of this failure
, along with an almost shocking complacency on the part of investors who have driven bond yields in countries like Greece, Portugal, Spain and Italy to, in some cases, record lows.
In fact at one point this year Spanish yields were lower than US 10 year bond yields
, implying that Spain was considered potentially more creditworthy than the US,
This incessant search for yield has driven investors into assets that in normal circumstances they wouldn't have touched with a barge pole
, this year's successful auction of 5 year Greek bonds, two years after defaulting on its debt, is just such a case in point, and going to show what short memories investors have
Yesterday's events in Portugal are a wakeup call to complacent investors who believed that Europe was starting to address its peripheral banking problems
, and while on its own events surrounding Espirito Santo could well be contained, the fact that these problems surrounding the solvency of peripheral banks, has come at a time when the recovery in Europe shows signs of stalling, is particularly concerning.
Debt to GDP ratios are already eye wateringly high
and this week's stunning capitulation in May industrial production data from Germany, France, Italy and the Netherlands has raised fears that the so called Eurozone recovery has become stuck in quick sand, and without growth to erode the debt levels the money that has flowed into Europe could well come flooding back out.
As it is peripheral yields in no way represent the true nature and risks of further debt restructurings
in the affected countries.
With European banks already gearing up for the latest ECB stress tests as part of the asset quality review,
the fear is that this little air pocket of turbulence could well turn into something worse, particularly given that these problems in Portugal should have been picked up while the country was still under its troika bailout plan.
- still in the overall uptrend since the 2012 lows. The broader range remains intact and while we hold above the 1.3500 level, the risk of a move back towards 1.3700 remains more likely. The key support remains at 1.3485 where we have trend line support from the 2012 lows.
- while 1.7180 continues to cap the topside, the risk for further gains towards 1.7330 remains, while above 1.7040. 1.7330 is the 50% retracement of the decline from the 2007 highs at 2.1160 and the lows at 1.3500 in 2009. Only a move below 1.6910 support delays the scenario above.
- currently finding selling interest around the 0.7960 area, which had acted as support on the way down. The 0.7880 remains the next target while below the 0.7960 area, with a move through here potentially targeting the 0.8035 area. The pressure remains on the downside while we remain below trend line resistance from the March highs now sitting just below the 0.8055 level.
- slipping below 101.80 keeps the broader range intact but we could see a move back to the lows this year at 100.60. On the upside we need to get back through resistance at 101.80 to open up a move back towards the range highs at 102.75.
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