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28 June 2015

Ready for tomorrow?

After all, things in Greece precipitated to an ending within hours of the last press review. Greece was left between the sword and the wall and the Greeks opted for the former. Portugal is next in the line of fire, but an eerie serenity reigns in the country. The mercury is up and most folk are at the beach this weekend; the media speak of football and hockey.

In reality much has changed since yesterday, and Portugal, even if not yet aware, is today a much more fragile country. Events will go sour, and possibly much faster than most expect. Hereby a short list of the gravest developments that are to take place from tomorrow onwards.

1. The Stock Exchange. Markets are fast reacting to cataclysms, Portuguese companies are largely uncovered at this moment and will not be spared; banks will be the hardest hit. Trading is likely to be suspended some hours after opening. The sensible attitude is to not open the Lisbon stock exchange tomorrow morning and wait at least a few hours to see how things go around Europe.

2. The Contagion. Yesterday there were already news of medicines and certain foodstuffs running out in Greece. Tomorrow panic can take over and diary food quickly vanish from supermarket shelves. By Tuesday it will start to be hard finding petrol and diesel. Cuts to the electricity supply will then be a step away. The sovereign bankruptcy will soon be followed by a wave of bankruptcies in the private sector that will spread like fire. Portuguese banks will be even more threatened, some might not survive this summer, following the trails of Banco Espírito Santo.

3. The Debt. Interest rates on the Portuguese sovereign debt are set to explode, leaving Portugal once again barred from the bond market. In the short term Portugal has provisions set aside to face this set back. The minister of finances was much criticised for the awkward way she announced these provisions, but these will certainly be useful in the months to come. Problem is: they won't last forever.

4. The Interest Rate. The euro will tank, possibly closing this week already under parity to the US dollar. Inflation will soon return to the Euro-zone (likely already in July) and the ECB will be pressed to raise interest rates. When it does so, it will render a large swath of Portuguese families and companies insolvent. It follows that the Portuguese banking system (or whatever may be left of it) will go insolvent too.

The abrupt end to negotiations over Greece's debt leaves the precession of events now largely out of control. Few can make something to remediate the unravelling described above. The Eurogroup is at this stage in the drivers seat, from a practical perspective there is hardly anything it can do now. The Greek Government can try to impose capital controls and start rationing first need foodstuffs and energy. The ECB has more cards to play, it can, for instance, keep feeding liquidity to the Greek banking system justified with the need to avoid contagion - but such deeds shall require great political courage.

Portugal is up for an hot summer, days of uncertainty never lived in its 40 year old democracy.