Introducing the Not So Stylish Portuguese Haircut

Reggie Middleton's picture

For those who feel that the simple application of arithmetic and math
amounts to “Doomsday Scenarios”, Fear-mongering, and vultures in the
market place, I present to you BoomBustBlog’s scenario analysis of the
Portuguese Haircut.


You think those are ugly? You ain’t seen nothing yet!

The Mathematical Truth Concerning Portugal’s Debt

Before I start, any individual or entity that disagrees with the
information below is quite welcome to dispute it. I simply ask that you
com with facts and analysis and have them grounded in reality so I
cannot right another “Lies,
Damn Lies, and Sovereign Truths: Why the Euro is Destined to
“. In other words, come with the truth, or at lease your
closest simulacrum of it.

In preparing Portugal’s sovereign debt restructuring model through
maturity extension, we followed the same methodology as the Greece’s
sovereign debt maturity extension model
and we have built three
scenarios in which the restructuring can be done without taking a
haircut on the principal amount.

  • Restructuring 1 – Under this scenario, we assumed that the
    creditors with debt maturing between 2010 and 2020 will exchange
    their existing debt securities with new debt securities having same
    coupon rate but double the maturity. Under this type of
    restructuring, the decline in present value of cash flows to
    creditors is 3.3% while the cumulated funding requirements and cumulated
    new debt between 2010 and 2025 are not reduced substantially.
    The cumulated funding requirement between 2010 and 2025 reduces
    to 120.0% of GDP against 135.4% of GDP if there is no
    restructuring. The cumulated new debt raised is reduced
    marginally to 70.6% of GDP from 72.2% of GDP if there is no
    restructuring. Debt at the end of 2025 will be 104.8% of
    GDP against 106.1% if there is no restructuring
  • Restructuring 2 – Under this scenario, we assumed that the
    creditors with debt maturing between 2010 and 2020 will exchange
    their existing debt securities with new debt securities having half
    the coupon rate but double the maturity. The decline in the
    present value of the cash flows is 18.6%. The cumulated funding
    requirement between 2010 and 2025 reduces to a potentially
    sustainable 99.5% of GDP and the cumulated new debt raised will
    decline to 50.1% of GDP. Debt at the end of 2025 will be 88.6%
    of GDP (
    a potentially sustainable).
  • Restructuring 3 – Under this scenario, the debt maturing
    between 2010 and 2020 will be rolled up into one bundle and
    exchanged against a single, self-amortizing 20-year bond with
    coupon equal to 50% of the average coupon rate of the converted
    bonds. The decline in the present value of the cash flows is 17.6%.
    The cumulated funding requirement between 2010 and 2025 reduces
    to 100.1% of GDP and the cumulated new debt raised will decline
    to 52.8% of GDP. Debt at the end of 2025 will be 90.9% of GDP (a
    potentially sustainable).

We have also built in the impact of IMF/EU aid on the funding
requirements and new debt raised from the market between 2010 and 2025
under all the scenarios.

A more realistic method of modeling for restructuring and haircuts

In the previously released Greece and Portugal models, we have built
relatively moderate scenarios of maturity extension and coupon
reduction which would be acceptable to a large proportion of creditors.
However, these restructurings address the liquidity side of the
problem rather than solvency issues which can be resolved only when the
government debt ratios are restored to sustainable levels. The
previous haircut estimation model was also based on the logic that the
restructuring of debt should aim at bringing down the debt ratios and
addition to debt ratios to more sustainable levels. In the earlier
Greece maturity extension model, the government debt at the end of 2025
under restructuring 1, 2 and 3 is expected to stand at 154.4%, 123.7%
and 147.0% of GDP which is unsustainably high.

Thus, the following additional spreadsheet scenarios have been built
for more severe maturity extension and coupon reduction, or which will
have the maturity extension and coupon reduction combined with the
haircut on the principal amount. The following is professional level
subscscription content only, but I would like to share with all readers
the facts, as they play out mathematically, for Portugal. In all of the
scenarios below, Portugal will need both EU/IMF funding packages (yes,
in addition to the $1 trillion package fantasized for Greece), and
will still have funding deficits by 2014, save one scenario. That
scenario will punish bondholders severely, for they will have to stand
behind the IMF in terms of seniority and liquidation (see How the US Has Perfected the Use of Economic
Imperialism Through the European Union!
) as well as take in excess
of a 20% haircut in principal while suffering the added
risk/duration/illiquidity of a substantive and very material increase
in maturity. Of course, we can model this without the IMF/EU package
(which I am sure will be a political nightmare after Greece), but we
will be recasting the The Great Global Macro Experiment, Revisited” in
and attempt to forge a New Argentina (see
Comparison of Our Greek Bond Restructuring Analysis to that of

Here is  graphical representation of exactly how deep one must dig
Portugal out of the Doo Doo in order to achieve a sustainable fiscal
situation. The following chart is a depiction of Portugal’s funding
requirements from the market before restructuring…

This is the same country’s funding requirements after a
restructuring using the same scenario “4″ described above…

And this is the depiction of new debt to be raised from the market
before restructuring…

And after using the scenario “4″ described above… For all of you
Americans who remember that government sponsored TV commercial, “This
is your brain on drugs. Any Questions?

The full spreadsheet behind all of the calculations, scenarios, bond
holdings and calculations can be viewed online here (click this link) by professional level subscribers. Click here to
subscribe or upgrade

Please be sure to read up on our full Pan European Sovereign Debt Crisis analysis,
which is freely available to everyone. Coming up next are a more
realistic recast of Greece’s restructuring scenarios (with the goal of
attaining GDP/Debt ratios below 100%, as well as similar research for
Spain, Italy and Ireland.

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Notenpresse's picture

"America has heard the bugler call--and you know it involves us one and all"

iLivedINhaitiOnce's picture

Thanks ATM, good link.

Temporalist's picture

That's a nice watch you got on there Reggie.  Does it have any precious metal in it or is it made of plastic?  I don't think you have to answer that one.

Maybe got some diamonds on it?  I wonder if diamonds have any value?  I wonder if it is because they are scarce?


U.S. faces crisis in rare earth materials

Published: April 16, 2010 at 10:31 AM

You are siding with a guy that just said if you don't do what the U.S. says they'll kick your ass?  I guess it's a good thing that Obama just won the preace prize.

FRNs or die!  or  Give me liberty or give me death!

dumpster's picture

Reggie,  good stuff .. was not looking for typos

no red pencil here.  

and who really cares ,, lol

its the effort the content and overall direction and information that is important

QQQBall's picture



Hire a young hottie to proof your stuff. Good analysis can sometimes get lost in silly typos.


Thanks for the article

ATM's picture

This is an excellent, concise and completely accurate depiction of the current European soveriegn problem and it's simple solutions. Enjoy.


M.B. Drapier's picture

Mr. Middleton: have you considered taking a close look at the balance sheet of the Eurosystem (ie. the ECB and friends) itself, to follow up on the concerns expressed by for example Willem Buiter (or more recently Der Spiegel)? Of course one can't trade ECB shares, but I think there might be some actionable intelligence in there nonetheless...

(Sorry if this is something you've already covered.)

dumpster's picture

how to support these paper currencies


you got it..... gold coming soon .for the brain washed cant eat it crowd

 .. even dennenger the great pile .

dumpster's picture

The Spanish, Portuguese, and Italian banks will next go belly up and quickly, as they sink with PIGS debt and other credit assets tied to fallen property. Spain will make the most shrill sounds, for a simple reason. They were the worst offender in holding onto mindless unreasonable lofty property values. Their bank books have the biggest drop to realize, after re-entry to reality. The crises underway in the remainder of PIGS nations will continue unabated, and usher in magnificent events where a legitimate

 gold-backed currency arrives

, urgently needed to provide stability.

 more willie

dumpster's picture

Those who feared a continental Amero currency for North American usage, a sustained Euro currency for European usage, and an emerging Yuan currency for Asian usage, must go back to the drawing board or replace the perceptual prisms. Prepare for several gold-backed new currencies. China is talking of a gold component to the Yuan currency. So is Russia. My hunch is that Russia will either participate in the new gold-backed Northern Euro currency or launch its own gold-backed Ruble currency.

willie    johnny bravo  800 gold on a pigs eye

Kina's picture

excellent stuff

Jake Lamotta's picture

Haircut?  No sir, it is an iroquois scalping with fresh blood still on the canvas of hair! 

Rick64's picture

I really trust those people doing the restructuring/bailouts they always get the numbers right. Can anybody tell me the last time this kind of thing worked, not sustained but really worked? Haircuts? they are gonna get scalped eventually.

dumpster's picture

not worked lately 


try a gold backed currency,, coming to a country near you

these will be the go to areas .. backed by gold ,

the british and US fraud fiat last to come to their senses


bingaling's picture

I think that article was very good thanks for posting it -

ZackAttack's picture

But we'll call our secret police against anybody who dares stand against our *God Given Right* to roll over debt in perpetuity at interest rates that bear no relationship to the risk of our country's finances.

Diogenes's picture

I like the part where he said the debt crisis was hardly a surprise as it had been coming for 30 years. Is this the first time a TV pundit admitted that the crisis was totally man made and predictable?

Paul E. Math's picture

You know, I thought Crescenzi was going to go in the opposite direction in answering his question of gold v. fiat.  I still think the answer is obvious and can't believe this he went the other way.

Gold is such a limited finite resource that you can fit all that has ever been mined in the world into just 2.5 olympic sized swimming pools!

But this guy would rather trust the 'hegemony' of USD?? 

Crescenzi puts his faith in the US military.  How's that working out in Afghanistan?  How is that working out in Iraq?  How did that work out in Vietnam?

Augustus's picture

Afghanistan - Better than Taliban

Iraq - Better than Saddam

Vietnam - Better than what befell the poor souls when the Democrats abandonded them leading to 3,000,000 dead.

dumpster's picture

still thinking like a two year old

it depends on the value of the gold .

such mindless .. gold grows at 2% a year

value the gold to match the liabilities of nations .

plenty of gold ,, that it is a limited resource is good .. as it limits the governments to create new fiat to wage war ,, . if the international balance gets out of hand . nations would take gold to satisfy the debt of nations .


or did i read you wrong



Paul E. Math's picture

I think you read me wrong. 

I'm saying that 2.5 swimming pools is actually a very small amount.  Especially when compared with the infinite ability (and propensity) of central banks to print fiat.  Especially considering the ability and propensity of governments to increase their liabilities.

Supply and demand.  The supply of gold is very limited whereas the supply of fiat is infinite.

Gold has value.  Fiat, you just don't know.

nuinut's picture

I don't consider 5.3 billion ounces of gold to be a small amount.

Except when you compare them with how many $FRNs? I can't keep up.

dumpster's picture

10-4  nice come back  lol

will erase the bad print

mynhair's picture

Restructuring 5:  Stick it all on US taxpayers, in the guise of 'making the world safe from bazookas'.

Proof:  See US.

Nice work, Reggie, thanks.

percolator's picture

I'll take gold and Tony can have dollars.

Reggie Middleton's picture

Go to the 5:10 mark, or so abouts, and answer the quiz about Gold and swimming pools: CNBC's Worldwide Exchange with Nicole Lapin: The Cost of Debt Default

Goldbugs, UNITE :-)

nuinut's picture


I respect the fact that you have obviously taken the current financial system as you found it, and worked it to your best advantage. Kudos to you. Seriously. You are clearly successful.

I have prepared a response to this interview, as I found it to be so much propaganda, and anyone who wishes to do so can view it here.

The video should be viewed in it's entirety, by everyone. To direct viewers only to the segment mentioning gold is condescending.

It is perfectly understandable that you should want the current financial arrngements of the world to continue, and obviously gold is a direct threat to that.

But, Reggie, just as King Cnut found, you cannot hold back the tide.


p.s. Your other analysis is first class. The gold blurb was a good way to get more traffic.



RockyRacoon's picture

What's the point again?  Swimming pools and U. S. military might?  Some comparison there, Leo.  And yes, I'm being obtuse.   Crescenzi doesn't really offer a valid alternative to gold.  Having a chunk of the 2.5 olympic pools full of all the gold ever mined, or having a Federal Reserve Note that is being debased daily, well, you know my choice by now. He avoids the money printing frenzy debate.  All he offers is a verbal smirk.   I think "disingenuous" is the word I'm looking for.  If he is the best Pimco has to offer then they are going down.

sheep92's picture

A few questions about your model assumptions:

1. are the haircuts which you posit off of current bond prices?

2. I can't find your assumption for nominal gdp growth.  What are these numbers and how did you arrive at them?

3. Do you do any sort of monte carlo simulation where you pull forward refi rates and nominal gdp growth from some distribution?

Thanks for your efforts