More Denial In Europe

Portugal Bond Rout Overstates Greek Likeness

Portugal’s bond-market rout suggests investors aren’t rewarding the nation’s austerity efforts and are concerned about a Greek-style reduction in debt repayments.

Portuguese bonds handed investors a loss of 6.9 percent so far this year, the worst performance among 26 sovereign-debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. The slump that drove its yields to euro-era records this week overstates the risk of investor losses, known as haircuts, according to analysts at Deutsche Bank AG, BNP Paribas SA and ING Groep NV. Portugal has a lower funding gap than Greece and its progress in cutting its deficit will allow it to better weather debt-market turmoil, they said.
Just because Portugal trades where it trades doesn’t mean it needs a haircut,” said Padhraic Garvey, head of developed market debt at ING in Amsterdam. “Our baseline view is that Portugal probably needs another two or three years of help from the European Union and International Monetary Fund, but that haircuts will be avoided.”
The nation’s two-year note yields reached a euro-era high of 21.82 percent on Jan. 31, surging almost 10 percentage points, or 1,000 basis points, in less than three weeks. Ten- year yields also rose to a euro-era record that day, climbing to 18.29 percent. The rates were 17.63 percent and 14.32 percent, respectively, at 11:29 a.m. London time.

My view:
With bond yields in excess of 20% and debt to GDP above 110% it is clear the Portugal is in big trouble.

But denying trouble seems to be the theme of 2012 so far.

The EU is racing to put a band-aid on the Greek debt problem before a large bond payment comes due on March 20, and analysts at ING are making irrational comments about Portugal not needing a debt haircut.
Let's get real.
There is no way that Portugal can service this level of debt at anything close to these yields.
Even if the yields were at 3% the debt would be difficult to service IF they were not running deficits.
So default is inevitable.
The open question is when.
The stock market has been remarkably resilient in the face of all this trouble.  This causes me to change my view that we may see more upward movement over the next few weeks than initially expected.

One level I am watching closely is the 78.6% retracement level on the S&P that happens to be 1373.   This is a candidate for the top before the March/April/May selloff begins, if I am correct.


  1. Lets face it. Greece is on an inevitable path to default. Negotiations are well underway on what the haircut will be for investors. Whatever Portugal's fiscal situation, its folly to believe that a Greek default ("restructuring") will not hit Portugal and cause the same there....

  2. Agreed farmland investments.

    And the serious of dominos falling will not stop with Portugal with the interconnectedness of the banks thanks to credit default swaps. What we do not know is how long the entire scenario will take to play out.


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