Portugal and the Euro Zone Debt Crisis Trauma

It looks like Portugal was in the mood for a Throwback Thursday when its debt woes came back to haunt the financial markets yesterday! How bad was it and are we about to see a return of the euro zone's dark days?

For the newbies out there who haven’t been around during the peak of the euro zone debt crisis nearly half a decade ago, here’s a little Flashback Friday for y’all. You see, back in 2009-2010, forex headlines were chock full of updates regarding the sovereign debt situation in the euro zone, from news of swelling government budget deficits to bailout negotiations and even speculations of a euro zone breakup. So much drama indeed!

Although the dust has settled over the years and several measures have been implemented in order to prevent the crisis from worsening, there’s no denying that debt troubles still plague some of the euro zone member nations to this day. A bit of progress has been made, as a few nations stayed afloat thanks to massive bailout packages from the EU and IMF while others were able to revive their local banking sector and get upgrades from credit rating agencies, but there appears to be no erasing the trauma that this crisis has inflicted on financial markets.

This explains why the euro and European equities suffered a sharp selloff recently, as one of Portugal’s largest banking groups suspended trading of its shares due to “material difficulties.” Apparently, Portugal’s Banco Espirito Santo has been suffering a “serious financial condition” and had to delay short-term interest payments on its debt securities, causing several investors to be concerned about the overall health of the country’s banking sector.

Just how bad is it? Well, Banco Espirito Santo is Portugal second-largest bank in terms of value and holds a large exposure to debt securities of other euro zone nations. Apart from leading to concerns about a potential financial market crash, this also revived fears of contagion and reminded market participants that the euro zone still has a long way to go before completely recovering from the debt crisis that occurred a long while back.

But let’s not get ahead of ourselves. Some say that the sharp selloff yesterday was an overreaction to the news, as it was also compounded by bleak medium-tier economic data from the euro zone (French and Italian industrial production, French CPI) and the shaky risk sentiment surrounding the U.S. earnings season. Suffice to say, traders have been feeling extra jittery these days and that any mention of the magic words “euro zone debt crisis” is likely to ring alarm bells.

Do you think markets just had a panic reaction or is this really an early warning signal for a return of the euro zone crisis? Share your thoughts in our comment box!

In the mood to take a longer walk down memory lane and read more about the euro zone debt crisis? Here are some articles you might want to check out:

The Big Fat Greek Debt

Big Fat Greek Debt Part II

Happily Ever After in Greece?

EZ Debt Problems: Round 2

Euro Zone Debt Crisis Prompts Action from Leaders

Is Euro Zone Over the Hump?

EZ Debt Crisis Deal: Good Enough for the Euro?