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Portugal's upcoming private debt problem
Portuguese National Statistics Institute reported yesterday that the average debt-to-equity percentage of Portuguese companies has reached a staggering 140%. In the economy which is now perceived as the next problem within EMU, such high average percentage of enterprise debt will not only have a big impact on Portuguese economy, but also on EMU in general.
One does not need to be reminded that Greece has succumbed to external help mechanisms in coping with its debt, which was only higher by 1000 bps than the debt held by Portuguese companies. Furthermore the markets view on corporate vs sovereign debt does not favor Portugal's optimistic long term view considering economic growth. Although Portuguese NSI reported that the GDP has increased by 1.7% in the last quarter one needs only to take a closer look into main contributors of said growth.
Most of the growth was achieved by government spending, and private contribution continues to fall in the overall GDP. Credit Derivatives market reflected its positive attitude towards EMU, and Portuguese companies have, therefore, been the largest beneficiaries of CDS market tightening. Four out of five highest daily tighteners were Portuguese companies with Hellenic Telecom Org SA completing the circle. For more graphic representation consult with the table below.
Markets have, obviously, positively reponded to monetary and fiscal measures and that is reflected in the following credit derivative indexes which have all tightened today. The following table shows the general attitude towards EMU the best:
Also what is interesting is observing that T/W ration is above 90:1. Although EU GDP rose above analyst estimates and came at 0.2% the trend of such credit tightening is unsustainable on the long term.
Here is the broad spectrum CDS data for May 13th:
Per Diario del Noticias:
In a statement to Lusa, the official said "there are essentially two direct negative impact" before this set of additional measures to the Stability and Growth Pact (SGP) today announced by the Government.
"There is a tax increase, which is negative for shareholders and from this point of view, the productivity of the financial sectors. There is a second negative aspect for a segment of the market that is consumer credit," said Gonçalo Pascoal .
The chief economist of Millennium BCP also considered that "liberating the increased rates on earnings may affect savings," a measure "is justified only with this need to raise additional revenue."
On the one hand, "from the standpoint of fiscal consolidation and face what is the goal for 2001 - to achieve a deficit of 4.6 percent - are measures of constraint and they tend to have an immediate adverse effect on economic activity . It is natural that there be a slowdown in consumption and a direct impact on public investment. "
However, Gonçalo Pascoal pointed out that there is in this package, "a positive side, to create and restore confidence, both the internal point of view, either from the point of view, a time of great pressure from financial markets. "
The Government today announced a series of austerity measures to accelerate the reduction of the deficit at 7.3 percent in 2010 and 4.6 percent in 2011 to respond to pressure from international markets.
Among the measures, negotiated with the PSD, are the increase in VAT by 1 percentage point in three levels, creating an extraordinary rate on companies with a taxable income over two million of 2.5 percent, the reduction 5 per cent in the salaries of politicians, public administrators and members of regulatory authorities, and an extraordinary rate of 1 percent for those receiving up to five minimum wages (2375 euros per month) or 1.5 per cent for those receiving above that value.
All this measures will have an impact on both public consumption, private debt service, availability of long term borrowing, debt servicing costs, debt insurance cost and overall growth. As mentioned before, private debt is unsustainable as it is, and this measures, while obviously ineffective even from a theoretical point of view, will only push the country further into austerity spiral and since EMU-EU countries move in a synchronized manner we can expect more development concerning EMU-EU zone in the future.
It is not hard to see the direct implications of rising taxes combined with austerity measures. Portuguese companies will weaken in the following months and a larger percentage of cash flows will flow towards debt service and debt insurance service. Enterprise spending will evaporate due to increase in income taxation and unavailability of access to long term credit facilities. Contagion in the private credit derivatives markets will spill over to sovereign debt insurance and with increasing yields + large future bond redemptions, which total 3 trillion EUR for EMU countries in the next three years, ECB and members of the monetary union will need to take steps similar to those which were taken on Sunday when the 1 trillion back up plan was announced.
My belief is that monetization of debt in the secondary market will need to increase if these scenarios play out; and to artificially strengthen the EUR, I am afraid, EMU will decide to either cut lose some of EMU members from the monetary union to strengthen up the join currency or enforce pegs with non EMU countries. With utilization of future swap facilities the move should translate into a stronger EUR in the short term, but long term perspective remain bleak and uncertain at best. It is unclear how will measures of austerity and taxation translate into a sustainable economic environment. Due to my long term bleak prospect regarding both the EUR and the USD I recommend hedging a prospect of a devalued currency with gold and other stores of wealth which have proved to have the highest growth over a longer period of time, above all other assets classes and currencies; which this chart demonstrates perfectly:
If you want to monitor the situation daily I recommend following key indicators such as LIBOR, EURIBOR, LIBOR/EURIBOR spread, Markit iTraxx Europe, Markit iTraxx Euro Senior Financials, as well as, private credit derivatives market and sovereign credit derivatives market. That should give you insight into future macroeconomic developments better than following daily equity charts.
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Cheeky,
You have been working hard for us lately. Thank you. Wonderful to connect with your brain on these things and collect these perspectives. There is something bigger at stake too and you have probably figured this out: The more of these kinds of posts/thoughts are out there to be read, the more opportunity for the information to take off, take hold, and flow back to the beast. I have run into Gordon's posts on many other forums. This shit shapes opinions and more. That we all trust you with this spot (and great you don't need to get paid, do you realize how fortunate you are with that aspect of things) is the very highest compliment. This website is not as highly rated as it is because these people have bad judgement about how they are running this site.
Stab it with your steely knife, stroke those keys, go baby go.
I am not the queen, but if I were, I would dub you "Sir Cheeky."
Can you hear it, with a little Monty Python shrillness? "Sir Cheeeekeah!"
You are loved.
I like how you are not self conscious about the writing. Keep that up. Be you.
Great article Cheeky.
I have been thinking that it is the SECOND country to "go Greece" that will demonstrate the contagion effect. Then everything accelerates down.
I do not see how we get out of this box. It is up to each of us to get our families through this. Great information helps. Acting (buying gold, guns, etc.) also helps, at least to sleep better.
Debt is a killer.
Thank you to CB for compiling the data and authoring the post.......and to the ZH team for providing a forum for it!
CHEERS!
D
Banker Bible: Book of Goldman 13:6. Too much truth is injurious to health. Stay away from it. Listen only to bankers, they are the chosen ones.
You shall only worship the Golden Kalf as your true god!
Yeah verily and fleece the golden sheeple.
James Shugg of Westpac on Bloomberg Radio this AM discussing the Euro.
Austerity measures (in the Piigs) may meet with greater resistance than expected as people figure out that the "cutbacks will kill babies and old people as has happened in Latvia".
At least California has less of a chance of default than Iraq. Not good. On the bright side we are expecting some serious swell generating from the southern hemisphere to follow in line with the exceptional winter we had surf-wise.
In all seriousness, thank you CB. The fog is lifting from my perspective of our truly global economy. All the best.
+100
Also California has the Terminator, who do they have? The sandman?!
HA!
The Terminator can kick The Sandman's ass anytime!
Metal beats Sand!
Thank you Bolweevil. Yeah California, Iraq, Venezuela; the holy trinity of the derivatives market. Chavez will inflate the debt and trigger a debt event, Iraq has 20 trillion bucks in oil sitting underground which should be plenty to support itself. Looks like California is the one which is FUBAR.
Hey boyz, OT, we're coming on to a private debt problem swamped and shorted by mean carbon credits to say the least, creating sic and evolved monsters from the deep, think killer oil whales and the such. Bionically and biologically is there hope for slowing and stopping our oil volcano distruction down here? With soon to be 2 strikes coming down the hole, will Leo and the likes please give us an update on ...how far should we be moving away from the slicky sand???? I don't think I'll be getting rich panning for oil and I'm sure FL's fresh out of cc's!
Edit: Sorry Leo, that's prob George's expertise, ffs give me a break it's late! Just give me brains and possible solutions, dilutions, or delusions whatever!