A skyrocketing euro for a deep diving Europe

Although it is not the first time I write about why I think the actual exchange rate of the euro against other currencies is wrong (see here and here), the latest developments on the Eurozone's life well deserve a revision of the subject. A quick look at the Eurozone lets one see some not very encouraging facts. The Greek tragedy has been quieted down in the last days but is far from over. In fact almost everybody with eyes in the matter is expecting a default sooner rather than later. The only uncertainty seems to rest in knowing if it would be an orderly default, basically a giant debt restructuring effort (hopefully...), or a messy one.

On the opposite side of Europe we have Portugal, but it seems to be in the opposite side only geographically speaking, because its bonds have also been kicked out of investment grade and are now officially  'junk' grade like Greece's. This will make Portugal financing efforts (even) more difficult, which in turn could end with Portugal asking Europe for more money soon. And to complete the domino effect, this troubles are putting extra pressure into Italy's and Spain's not-exactly-buoyant finances.

Credit: Yahoo! Finance

But the euro simply does not care. As seen in the graph above, the euro is rising against the US Dollar, the British Pound and the Chinese Renminbi, and it is doing so with a specially notable rally in the actual week despite all the bad news surrounding the Eurozone. The european currency is spiking also against special cases like the Japanese Yen and the Swiss Franc, although this is a totally different matter. The Yen has its own set of playing rules because of the Fukushima incident, and the Swiss Franc had been overtly growing uncomfortable with its strength against the euro affecting their exports competitiveness. The case with China's Renminbi is a difficult one to analyze, but what happens with the Dollar and the Sterling Pound?

And now Portugal... But hunters already looking for their next prey

Here comes the latest member (it is almost there) to join the euro-bailout club: Portugal. This is not breaking news, as everybody was expecting this to happen sooner or later. It is not frightening either, as Portuguese contribution to the whole European GDP is relatively low; it is lower than that of the Irish and clearly the eurozone did not break because of Ireland's (or Greece's) bailout. Belgium is mentioned too, but that would not pose a much bigger problem than Portugalm, but what IS frightening economists worldwide is the possibility of Spain or Italy being next.

Portugal 10-year Bond. Credit: Bloomberg

The pattern on European bailouts is becoming worryingly clear. One country's economy begins showing signs of slowing down and continues with its excessive debt issuing. Rating agencies notice (thus making the yields go up), international investors notice (and ask for bigger yields on said sovereign bond) and last but not least speculators notice and try to take advantage of the situation. The death spiral has begun and everybody knows the results... The same moment this happens, the whole financial world locks in to their next target; the most suitable candidates being now Spain and Italy. The first expression that comes to mind when mixing the word 'bailout' and the name of Spain is 'too big too fail'. The expression is already familiar for American people but European people have not suffered it yet. The falls of Greece and Ireland were manageable for the European rescue fund, but a crash in Spain, or Italy, would pose an enormous problem to the whole eurozone. But disregarding what the hunters (speculators) want, is really Spain in need of a bailout?