Risk Management, Trading & Portfolio Strategies

Portugal’s sovereign debt crisis portends global market risk flare-up

Portugal's government is under pressure from its international creditors.

Portugal’s government is under pressure from its international creditors.

Everywhere you look in today's global markets, there appears to be cause for alarm. Investors scouring the news for information that can help them monitor their risk profiles more accurately might want to turn their eyes to Europe, where a new set of developments threatens to derail the fragile economic progress made so far in 2013.

Portugal, since 2011, has been undertaking a harsh program of austerity proctored by the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission. These three organizations, known collectively as the troika, have insisted on budget cuts and tax increases to make up for the credit instruments offered to Portugal's government.

In the time since, however, a rising number of critics have pointed to the failure of Prime Minister Pedro Passos Coelho's administration to rein in a deteriorating economy. The government's borrowing costs have steadily risen in recent weeks and, short of more assistive measures, Portugal could find itself without money before the year's end.

How will this influence systemic risk? The key fact about the European sovereign debt crisis is that, at its heart, it is also a financial liquidity crisis. National governments, forced to bail out their banks, are now mired in debt due to the confluence of poor money management and repeated private sector bailouts. If a nation like Portugal – or Spain, Greece, Italy, et. al., – is unable to pay its bills, the health of the entire financial system in Europe could be questioned. And, given the relatively fast pace in today's markets, banks could suffer major losses with little warning.

At the end of the day, investors need to prepare for rising volatility as the European situation unfolds. They also have to take advantage of portfolio monitoring tools that help them pinpoint aspects of their portfolio that might lead to problems in the future. Click here to learn how SmartStops provide an invaluable technological service. 

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