Portugal on verge of bailout
In the wake of a sovereign debt ratings downgrade by the rating agency Moody’s, Portuguese five-year bonds are trading with a yield of 10%. As a result, Portugal has leapt over Ireland into fourth place on the credit default swaps list of highest default probabilities amongst sovereign debt issuers.
A bailout by the European Union is a certainty, according to Moody’s.
The caretaker government under Prime Minister José Sócrates continues to insist there have been no discussions about a bailout. This is not credible. Mr. Sócrates was forced to call a new general election as his austerity budget was rejected by the Portuguese parliament. Subsequently, the country’s debt was downgraded by both S&P and Moody’s. Last week, we also learned that the Portuguese had missed their deficit target of 7.3pc last year. The deficit ended at 8.6pc. The country also revised 2009’s deficit up to 10pc from the previously reported 9.3pc figure.
Portuguese daily Jornal de Negócios has written that the country’s biggest banks met with the head of the Central Bank yesterday, imploring him to have the government contact Brussels in order to help secure financing before the general election in June.
All of this leads to a lack of credibility for the Portuguese government. The ECB is expected to raise interest rates this Thursday, adding further pressure to the periphery. Even German interest rates have climbed on the back of these expectations. This is why markets are selling Portuguese bonds. And with yields at these levels, a bailout is now inevitable.
After Portugal hits the wall, all eyes will turn to Spain.
It did not take a genius to realise that this was inevitable. This crisis will not stop at Spain. Look to problems in the core nations to emerge. It will take time and night not be apparent until a few defaults have taken their toll on the cores balance sheets. These bailouts have been a bailout of France, Germany and Belgium’s banks.
It did not take a genius to realise that this was inevitable. This crisis will not stop at Spain. Look to problems in the core nations to emerge. It will take time and night not be apparent until a few defaults have taken their toll on the cores balance sheets. These bailouts have been a bailout of France, Germany and Belgium’s banks.
Edward, I appreciate your insights greatly but please refrain from adding color to the situation. There is no such thing as default. Any outcome will involved an organized “restructuring”. The IMF and the Fed and anyone else with a stake in stability will have an interest in making sure there is an orderly management of any change in terms to the debt. I think it is only sensible to refer to the issue in that context.
Christian,
You must have misread the post because it is about the certainty of a bailout. Nowhere in it do I suggest that Portugal will default. Regular readers know this. Perhaps you came via a link into this post. Just last week I wrote the following:
“Greece has a solvency problem. The Irish banks have a solvency problem that has become the Irish government’s solvency problem. Portugal and Spain have liquidity problems.”
https://pro.creditwritedowns.com/2011/03/irish-stress-tests.html
We would like to see a proper resolution that avoids default. All policy makers are working in that direction. That said, I am not going to refrain from adding colour to the situation because that’s why readers come to the site; they are looking for my assessment of likely scenarios. At this juncture, it is too early to speculate about a Portuguese default. The only peripheral country that one knows will probably default is Greece.
Actually defaults or significant haircuts for bond holdholders would be best of all for the soveriegn tax payers. Without a significant reduction in the burden on taxpayers the outcomes for them will be severe austerity. Creditors need to relearn moral hazard as to who you lend to.
Edward, I appreciate your insights greatly but please refrain from adding color to the situation. There is no such thing as default. Any outcome will involved an organized “restructuring”. The IMF and the Fed and anyone else with a stake in stability will have an interest in making sure there is an orderly management of any change in terms to the debt. I think it is only sensible to refer to the issue in that context.
Christian,
You must have misread the post because it is about the certainty of a bailout. Nowhere in it do I suggest that Portugal will default. Regular readers know this. Perhaps you came via a link into this post. Just last week I wrote the following:
“Greece has a solvency problem. The Irish banks have a solvency problem that has become the Irish government’s solvency problem. Portugal and Spain have liquidity problems.”
https://pro.creditwritedowns.com/2011/03/irish-stress-tests.html
We would like to see a proper resolution that avoids default. All policy makers are working in that direction. That said, I am not going to refrain from adding colour to the situation because that’s why readers come to the site; they are looking for my assessment of likely scenarios. At this juncture, it is too early to speculate about a Portuguese default. The only peripheral country that one knows will probably default is Greece.
Actually defaults or significant haircuts for bond holdholders would be best of all for the soveriegn tax payers. Without a significant reduction in the burden on taxpayers the outcomes for them will be severe austerity. Creditors need to relearn moral hazard as to who you lend to.