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Ambrose
Evans-Pritchard at The Telegraph says Legal skull-duggery in Greece may doom Portugal.
I suggest that Portugal is doomed whether or not there is "Legal
Skull-Duggery". However, it's perfectly fair
to suggest that LSD will indeed make matters worse.
From Pritchard ...
Last month the
European Central Bank exercised its droit du
seigneur, exempting itself from loses on Greek bonds. The instant effect was
to concentrate more loss on other bondholders. "This has set a major
precedent," said Marchel Alexandrivich
from Jefferies Fixed Income. "It does not matter how often the EU
authorities repeat that Greece is a 'one-off' case, nobody in the markets
believes them."
The ECB holds €220bn (£185bn) of Greek, Portuguese, Irish,
Spanish, and Italian bonds. Its handling of Greece implicitly subordinates
private creditors in each country. All have slipped a notch down the pecking
order.
This might not matter too much if Greece were really a "one-off"
case but markets are afraid that Portugal will tip into the same downward
spiral as austerity starts to bite.
Citigroup expects the economy to contract by 5.7pc this year, warning that
bondholders may face a 50pc haircut by the end of the year. Portugal's
€78bn loan package from the EU-IMF Troika is already large enough to
crowd out private creditors, reducing them to ever more junior status.
EU leaders said last June that "Greece is unique" and
promises that haircuts would "not be replicated in Portugal". They
have since pledged that the EU's new bail-out (ESM) fund will not have
protected status.
ECB Lies
It's safe to stop right there. No one in their right mind can possibly
believe EU leaders or the ECB. Certainly the markets do not believe in such
fairy tales.
Portugal is interesting in that neither LTRO had much effect. For example,
10-Year Portuguese government bonds yield 13.86%. 2-year bonds yield 12.54%.
Meanwhile German 10-year bonds yield 1.8% and German 2-year government bonds
yield .16%.
Portugal cannot possibly survive on those spreads. Thus, what has to happen, will happen. Major haircuts are coming.
Pritchard notes fundamental reasons why.
Combined public and
private debt is 360pc of GDP, 100 percentage points above Greece. This is a
huge burden on a shrinking economic base. Its current account deficit was
still 8pc of GDP last year, much like Greece. Both countries are overvalued
by 20pc on a real effective exchange rate, though Portugal has barely begun
to cut unit labour costs.
Dimitris Drakopoulos from
Nomura said Portugal relied on "fiscal engineering" last year to
massage deficit figures, raiding 3.5pc of GDP from private pension funds.
Matters will come to a head soon. The IMF must decide by September whether
Portugal needs more money and debt relief. If Portugal now spirals into a
Grecian vortex, large haircuts loom. This time EU leaders will have to accept
that their own taxpayers will suffer losses - avoided until now - or violate
their pledge.
Europe's handling of Greece has guaranteed that global funds will rush for
Club Med exits at the first sign of trouble. The next spasm of the debt
crisis will that much dangerous if it ever comes. As the saying goes: Hell
hath no fury like an abused bondholder.
Bleeding Profusely From Help
Portugal is poised to blow up anytime now. Greece is already pricing in
further writedowns. Expect Ireland and Spain to ask
for writedowns.
Eventually voters in Germany, the Netherlands, Finland, or possibly even
France will get fed up with these repeated bailouts at taxpayer expense and
demand action. So will voters in Spain, Greece, Portugal, and Ireland, all
bleeding profusely from "help".
It is quite amusing to watch these bald-faced liars at the ECB, EMU, and IMF,
pretend everything is OK just as the sovereign debt default tsunami is inches
from shore.
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