Contagion from Portugal will be contained, F&C’s Scott argues

The lack of concern shown by markets to events in Lisbon reflects the low risk that Portugal will be abandoned by the troika and the expectation that contagion will continue to be contained, according to Ted Scott, director global strategy at F&C.

“The fact that the government’s bond yields only rose slightly in response to the news is testimony to the power of the ECB’s OMT programme in containing risk within the peripheries and maintaining the improvement in sentiment to the Eurozone. So long as the government does not fall as a result of the constitutional crisis that status quo will remain,” Scott said.

According to the director, the real significance of the court’s decision is that for Portugal it will contribute to a further deepening of what is already a severe recession.

Debt targets are likely to be missed yet again although the country may still be able to return to the open market given the recent stability in periphery bond markets as well as the global scramble for yield. Secondly, and of greater medium term significance, the decision is a further erosion of the troika’s austerity driven strategy to reform the public finances of the weaker members of the Eurozone.

“Ultimately, it hastens the day when the Eurozone policy makers are forced to abandon their self-defeating strategy or the currency union breaks up. The last word goes to the editorial in today’s FT: “without a European plan to boost growth, Lisbon’s sacrifice risks being in vain,” he said.

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