Goldman Calls For Bail Out Of Portugal And Ireland So Everyone Can Go Back To Buying Amazon And Ebay

Tyler Durden's picture

The more things are bankrupt, the more things stay the same. Evidence #1: Goldman's FUG (Francesco U. Garzarelli) sends a letter to clients in which he implies that Europe should promptly add Portugal and Ireland to its list of wards of the state, so that the Dow can go back to targeting 36,000 on short notice. Apparently this latest European nuisance (punctuated by the Irish Bund spread passing 600 bps) is too much for Goldman strategists, who are perplexed by this stunning inability of the ECB and EMU to grasp that in this market where the only buyer of everything are Central Banks and no market risk is supposed to exist, that Europe still has refused to step up to the plate and debase their currency by a few hundred bips. And after all, the only reason the EURUSD is trading where it is, is so that it has a whole lot of buffer room to fall.

From F.U.G.

After trading mostly in response to country-specific dynamics, as testified by the rally in Greece and the concomitant sell-off in Ireland between August and mid-October, sovereign EMU spreads have again become more correlated. To illustrate this, Kamakshya Trivedi has run a ‘principal component analysis’ on 10-yr government bond spreads between Germany and Italy, Spain, Ireland, Greece and Portugal to isolate the portion of the country spread variance explained by a ‘common factor’ on a 1-month rolling basis. This statistic has increased steadily since the middle of October, suggesting greater co-movement (interestingly, the implied correlation of stocks within the Eurostoxx 50 continues to moderate, in contrast to previous relationships to sovereign issues).

It is difficult to ascertain whether the increasing pressures on Ireland and Portugal have simply ‘spilled over’ or the market has built in more systemic risk after the restructuring facility proposals dating back to 29 October. It is probable that the timing of the German proposals has amplified the underlying concerns surrounding the two peripheral EMU countries (Ireland and Portugal) with oversized debt relative to the domestic ability to roll it over. The result is that the secondary market for these issuers is distressed, requiring ongoing direct intervention from the ECB.

In our assessment the ECB’s desire to regain control over overnight rates, reflecting the brightening in the growth outlook, and the discussions on strengthening the Eurozone fiscal governance structure and creating a credible mutual support scheme are both, on balance, supportive for sovereign spreads. But these developments have also raised near term uncertainties. As the experience of Sweden has recently shown, short rate volatility can increase substantially when excess liquidity is reduced, while the different proposals for sovereign restructuring schemes may sound like a cacophony in the ears of investors.

This leaves Ireland and Portugal exposed to an intensification of market pressures, increasing the probability that both Ireland and Portugal will need to apply for external support and funding from the EFSF, as Erik Nielsen has also argued in his commentary lately. We think such an outcome would reduce sovereign risk tensions where they are still brewing and lead to a broader compression in sovereign spreads. We note the following:

  • Greece, Ireland and Portugal (the ‘outer periphery’) have different problems, but can be grouped together in terms of small size, foreign distribution of debt, and low capacity of the domestic private sector to re-absorb claims held by foreigners and at the same time finance the new deficit. History suggests that sovereign issues come in clusters, and since the Greek events this Spring, the market has increased the focus on the remaining two.
  • Granted, Italy and Spain also have budgetary issues, but they are much bigger countries, with more diversified economies, and a deeper debt capacity. The market understands that an escalation of credit strains now experienced by Ireland and Portugal to these two sovereigns would command systemic repercussions. Based on the fiscal plans tabled by the respective governments, we very much doubt this is a scenario we will see unfolding.
  • The borrowing power of the EFSM/EFSF (EUR 500bn) is vastly larger than the funding needs of Ireland and Portugal (we calculate that the combined total borrowing requirement, including redemptions, will not exceed EUR 150bn over the next 3-yrs).  The cost of funds at the 5-yr maturity would currently be in the region of 2.3% (i.e., close to flat to mid-swaps). Assuming the charges for conditional funding are similar to Greece, the 5-yr EFSF lending rate would be in the region of 5% (mid-swap +300bp). By comparison, Irish and Portuguese 5-yr bonds trade at 6.9% and 5.5%, respectively, in the secondary market.

In conclusion, the combination of a more uncertain funding and evolving regulatory backdrop, together with ongoing tensions in the ‘outer periphery’, argue for an activation of the (conditional) mutual support framework agreed back in May. We think this would address the remaining sovereign liquidity issues in the Euro area, enable the ECB to relinquish the quasi-fiscal role it has assumed since the Greek debt crisis through its secondary market purchase of sovereign credit instruments, and finally allow the discussion on the Eurozone’s institutional setup to proceed in a more constructive environment.

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SheepDog-One's picture

LOL so bailouts of Eurozone will be a monthly event now? Print on, print masters of the universe! Go ahead, Im actually enjoying sitting back and watching the show!

Spalding_Smailes's picture

Just like pomo ...

No more risk. Debt is gooooooooooooooooood.

knukles's picture

Hah ha.
Goldilocks must be long PIIGShit.

Anybody else hear Jim O'Neil on the phone from the aisport this a.m. on Bloomberg (?).  Did it sound like he flew first class?

Hansel's picture

Goldman needs to wean itself from government cheese.  What a bunch of leeches.

AccreditedEYE's picture

As we are all very much aware, they are firmly entrenched. Short of burning down the house, I don't think there is a way to get rid of the roaches.

snowball777's picture

Goldman calls for bailout of Goldman CDS mistakes.

Bob's picture

They will only be mistakes if there is no bailout/payment of ransom.  As the game still stands at this point, they are 'investments." 

snowball777's picture

Agreed. Not being a corrupt crony capitalist, I often have trouble putting myself in their golf shoes.

AccreditedEYE's picture

Maybe post-bailout we can get another cute note from Jim O'Neill telling us "PS- Stupid Bears, we own/control the world." 

snowball777's picture

Hey Jim, here's a tip for ya:

"An investment in your safety"

SpeakerFTD's picture

porra lula vampiro

johny2's picture

Goldmans wants some more free money....

BurningFuld's picture

That is pretty much the stupidest analysis I have ever read. Do people actually base their investing on these con men?

Horatio Beanblower's picture

Not just people, governments too.

Charley's picture

File this under the imminent dollarization of Europe...

Montecarlo's picture

Literally?  I thought the Fed had a backroom trade with ECB that will us on the hook for failures in Europe.  When does it end?

Charley's picture

There is no "us" ... There is just the banking cartel with its headquarters in Washington DC -- the rest of us are tolerated because they need wet-nurses and gardners ...the Imperial Court (the "We" in "We, the People") needs new sources of dollar-denominated debt service and Europe seems to be the prime real estate for this ...

As in the earlier case of the American SHeeple, the European social safety net will be broken and discarded, and credit cards will be handed out to the survivors...

Leo Kolivakis's picture

You guys still don't get it. Don't fight the Fed, don't fight the ECB, don't fight central banks, China, sovereign wealth funds, Goldman, JP Morgan and the rest of the bankers. They will do whatever it take to reflate & inflate their way out of this mess. PERIOD. Just keep buying the dips, and relax. If you don't, you'll end up frustrated and miserable.

jesusonline's picture

Leo, we got your "don't be evil" mantra long ago. Relax man, roll over and enjoy the ride Bernanke's giving you. It might smell like roses still, but it's a ride down the toilet.

ZackAttack's picture

Look, I have no dog in the equity hunt, long or short, but I just want to ask:


Is there a shred of credible empirical evidence that altering inflation expectations actually leads people to spend?

Is there any actual science supporting the existence of a “wealth effect”?

If all this is just academic belief and conjecture, it would seem that what we actually have is an unelected 4th branch of government embarking on the most massive (and fascist in origin and belief)social engineering experiment in human history on a very questionable basis.


In the absence of evidence, one could just as plausibly argue that increasing inflation expectations would lead the public to save *more* to cover the gap.


Also, with the average 401K containing only $8,000 and inaccessible until age 59 – 62, it would be completely irrational for someone to believe they are actually any wealthier as a result of rising asset prices.


What evidence or historical precedent would you cite to suggest that these policies will work?

SheepDog-One's picture

Your song and tap dance routine is real old Leo. You're wrong, they will never reinflate themselves out of their own mess, just drive everyone off the cliff, and it fast approaches!

AccreditedEYE's picture

Leo, I find it incredible that a person of your intelligence doesn't see that there is only one way for this to end.... (hint: opposite of GOOD) The concept of money is about to reset itself... put the cheeba down man! 

Bill Lumbergh's picture

Very did this approach work out in 2008?

bania's picture


qussl3's picture

Smells like Goldman needs them PIIGS bailed out otherwise when the investigations come, they'll swing.

Steak's picture

Yes, I'm biased...but fuckit.  Bail out the Porras!

THE DORK OF CORK's picture

Ireland does not need more debt - it needs more credit to develop our strategic utilities.

A industrial credit bank could start increasing the money supply again now that the Irish banks are calling in their debts without giving out loans.

This could be accomplished by divorcing our deposits from external bonds held by the ECB and others leaving them with the mortgage paper - however this is unlikely given the stranglehold that both the BOE and ECB hold over this serfdom.

However the Irish state has another more limited war option - it can liquidate the rest of its state pension funds which still total 20 billion + and create a new bank with this as a deposit base to justify the creation of credit - this money can be multiplied withen the economy and therefore the goverment would more easily increase their tax take and dramatically reduce the fiscal deficit.

The fact that the Irish goverment has not done this already suggests to me it has zero independence and is just a eunuch executive with one ball deposited in Frankfurt and the other in London. 

tbd108's picture

Amazon and Ebay? You forgot to mention Netflix!


gwar5's picture

Wasn't Goldman Sachs the one who helped these countries with their bonds?

They already got called out cooking the books for Greece so they could quailfy for the EU.

Bailout their way of using OPM to let them off the hook?

mm17101978's picture

This ZH article about Goldman's take on Ireland and Portugal is posted at 9:47 am EST and on the same day at 11:35 am EST, RanSquawk comes out with Morgan Stanley's opinion that "Ireland will need a bailout very soon and possibly Portugal will also need one next". Maybe, being Italian, I am a cynical idiot but has the Great Plan of the major US banks (and the Fed, presumably) to destroy Europe ever been so evident as today? Scary............

PS Great Plan conceived, of course, to hide the fact that the US are insolvent

RockyRacoon's picture

...Italy and Spain also have budgetary issues, but they are much bigger countries, with more diversified economies, and a deeper debt capacity.

This is how financial stability is measured, an ability to take on debt.

The world is just frakkin' crazy.

jez's picture


Where is Boner of U2 when you need him?

He seems to have finished saving Africa now, so he must have lots of spare time to organise a "debt forgiveness" campaign for his native Ireland. And Portugal. And Spain and Italy and Greece. May as well add the US too, while he's about it.


JonTurk's picture

they bailed out Europe in June and EUR went straight up from 1.20 to 1.40, while everybody was screaming for the parity... there is no such thing called European it is the case in Japan, Japan economy is in shithole, Japanese QE all over the place but USDJPY has been falling like a rock...

as long as the bald servant keep droppin trillions of reserve currency my ass from airforce 1, seeking fundamental value in hard (my ass) currencies is like daydreaming of houris in an opium den...