This page has been archived and commenting is disabled.
Structural Problems Cannot Be Solved Though Bailouts! As A Matter Of Fact, Bailouts Make The Situation Worse
Bloomberg reports:Portugal Rating Cut on Possible Greek Follow and Portuguese Bonds, Euro Slide Downgrade
Moody’s Investors Service cut Portugal’s credit rating to below investment grade on concern the southern European country will need to follow Greece in seeking a second international bailout.
The long-term government bond ratings
were lowered to Ba2, or junk, from Baa1, and the outlook is negative.
Discussions to involve private investors in a new rescue plan for Greece
make it more likely that the European Union will require the same
pre-conditions in the case of Portugal, Moody’s said in a statement.
“That’s very significant because not
only does it affect current investors, but it is likely to discourage
new private- sector lending going forward, and therefore reduce the
likelihood that a country like Portugal will be able to regain access to
the capital markets at a sustainable cost,” Anthony Thomas, a senior analyst at Moody’s in London, said in a telephone interview yesterday.
Portugal is the second euro country
rated non-investment grade by Moody’s, joining Greece, after winning a
78 billion- euro ($113 billion) international bailout in May.
European finance ministers last week
authorized an 8.7 billion-euro loan payout to Greece by mid-July, basing
a second three-year bailout package on talks to corral banks into
maintaining their Greek debt holdings.
The euro fell 0.8 percent to $1.4429 at 5 p.m. yesterday in New York, from $1.4539 the day before, when it touched $1.4578, the highest level since June 9.
Portugal’s government debt agency is
scheduled to hold a debt auction today to sell as much as 1 billion
euros of bills maturing in October.
Here is an annotated summmary of BoomBustBlog Archives (in reverse
chronological order) regarding the Portugal situation over the past
year. I invite, if not challenge those who question the utility of the
higher end of the blogoshpere to compare BoomBustBlog opinion and
analysis (as biting, cynical and hard hitting as it may be) to that of
the mainstream media and the sell side analyst community of Wall Street
to determine if independent, proprietarry research in the form of a blog
is something that this country and the global investment community is
in need of... or not!
Over
A Year After Being Dismissed As Sensationalist For Questioning the
ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!
There has been a lot of noise in both
the alternative and the mainstream financial press regarding potential
risk to the ECB regarding its exposure at roughly 48 to 72 cents on the
dollar to sovereign debt purchases through leverage, and at par at that.
This concern is quite well founded, if not just over a year or so too
late. In January, I penned The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults.
The title is self explanatory, but expound I shall. Before we get to
the big boy media's "year too late" take, let's do a deep dive into how
thoroughly we at BoomBustBlog foretold and warned of the insolvency of
both European private banks and central banks, including the big Kahuna
itself, the ECB! The kicker is that this risk was quite apparent well
over a year ago. On April 27th, 2010 I penned the piece "How Greece Killed Its Own Banks!". It went a little something like this...
For Those Who Failed To Heed My Warnings On Portugal, Visualize The Contagion That Causes European Bank Failure!!!
Impact of bank’s banking books on haircuts
EU banking book sovereign exposures are
about five times larger than trading book. The table below gives
sovereign exposure of major European countries for both trading and
banking book. The EU trading book has €335bn of exposure while banking
book has €1.7t exposure towards sovereign defaults. EU stress test
estimated total write-down’s of €26bn as it only considered banks
trading portfolio. This equated to implied haircut of 7.9% on trading
portfolio with losses equating to 2.4% of Tier 1 capital. However, if
the same haircuts (7.9% weighted average haircut) are applied to banking
book then the loss would amount to €153bn equating to 13.8% of Tier 1
capital.
The Pressure On Portugal Increases As Ratings Agencies Finally Arrive To The Fire Before The House Burns Down
Events are unfolding precisely as paying subscribers should anticipate. A quick recap:
- Portugal Is On The Verge Of Tapping Out, UFC Style – You Knew It Was Coming, Here’s The Analysis! Thursday, March 31st, 2011
- ECB
Swallows Massive Portuguese Bond Losses As It Is Clear That The Third
State Will Soon Join The Bailout Brigade – Haircuts, Here We Come!!! Friday, February 18th, 2011 - The
Coming Interest Rate Volatility, Sovereign Contagion, Geo-political
Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global
Real Estate Through This Mess Tuesday, February 15th, 2011
If one were to dig deeper into link number 1, above, you will see the
impetus (with specificity) behind this next headline: CNBC - Portugal Banks Threaten to Shun Bonds: Report
Portugal's biggest banks will stop
buying government bonds and are urging the caretaker administration to
seek a short-term loan to secure financing until a June 5 election,
business daily Jornal de Negocios reported on Tuesday.
Of course, its very expensive throw capital down the toilet when your crapper is full AND you run out of capital!
The heads of Banco Espirito Santo, Millennium bcp and Banco BPI met with the governor of the Bank of Portugal on Monday to pass on their views, Jornal said.
Hey, we've heard that name before, haven't we?
And this is why we've heard that name before... It ain't just Europe!
It appears the phenomenon is virulent and
global - We've all been Bamboozled by the Banking Industry! Regardless,
the Chickens are coming Home to roost!
"Game Over"
Jornal de Negocios ran a separate
column on Tuesday titled "Game over, we have lost, Mr Engineer,"
referring to Prime Minister Jose Socrates who has insisted the country
needs no outside help. Socrates vowed on Monday to keep resisting a
foreign financial rescue for the debt-laden country, including the
short-term loan suggested by the opposition.
Yeah! Okay...
Asked if a loan from the IMF was possible if the country faced immediate financing problems, Socrates told RTP television: "I
don't know of any IMF financing line that would not enforce a programme
with conditions. "All programmes that have been negotiated so far were
very severe in terms of measures demanded from a country," he said.
What was originally borne from Europe may yet return. Am I the only one bold enough to hint at indentured servitude???
Comparison to slavery
Like slaves, [indentured] servants could
not marry without the permission of their owner, were subject to
physical punishment (like many young ordinary servants), and saw their
obligation to labor enforced by the courts. To ensure uninterrupted work
by the female servants, the law lengthened the term of their indenture
if they became pregnant. But unlike slaves, servants could look forward
to a release from bondage. If they survived their period of labor,
servants would receive a payment known as "freedom dues" and become free
members of society.[19]
One could buy and sell indentured servants' contracts, and the right to
their labor would change hands, but not the person as a piece of
property.
On the other hand, this ideal was not
always a reality for indentured servants. Both male and female laborers
could be subject to violence, occasionally even resulting in death. Richard Hofstadter
notes that as slaves arrived in greater numbers after 1700, white
laborers became a "privileged stratum, assigned to lighter work and more
skilled tasks."[20]See also: Black Codes in the USA
Have the Portuguese been Hoodwinked! Bamboozled! Run Amok? Led Astray?
Portugal Is On The Verge Of Tapping Out, UFC Style - You Knew It Was Coming, Here's The Analysis!
ECB
Swallows Massive Portuguese Bond Losses As It Is Clear That The Third
State Will Soon Join The Bailout Brigade - Haircuts, Here We Come!!!
Here is a sequence of events that I warned
thoroughly about, and is unfolding like clockwork. Witness the massive
destruction of capital, despite the fact that it could have been so
easily seen at least a year in advance. Let's walk through just the past
couple of months. In January, I posted "The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults". To wit...
About a month ago, I pulled the covers off
of the speculation over whether Portugal would default or not. Most of
the “experts” declared that a default was not in the cards. I strongly
recommended that the so -called “experts” pull out a calculator and run
the math. Not only will there be defaults, but the haircuts will look
particularly nasty. See The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by
The Anatomy of a Portugal Default: A Graphical Step by Step Guide to
the Beginning of the Largest String of Sovereign Defaults in Recent
History (December 6th & 7th, 2010).
The Truth Behind Portugal's Inevitable Default - Arithmetic Evidence Available Only Through BoomBustBlog
You don't need a "wikileaks.org" site to
reveal much of the BS that is going on in the world today. A lot of
revelation can be made simply by having motivated, knowledgeable experts
scour through publicly available records. I'm about to make said point
by showing that the proclamations of the ECB, IMF, the Portuguese
government and all of those other governments that claim that Portugal
will not default on their loans is simply total, unmitigated, uncut
bullshit nonsense.
If you recall, I made a similar claim regarding the Irish government and posted proof of such, see Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default… November 30th, 2010.
...BoomBustBlogger Nick asked:
Reggie-
Do you have any reason as to why they are choosing 2013 as a deadline ? Seems like an arbitrary date.
Well, Nick, just follow the money or the lack thereof…
So, what debt raising and servicing that
was unsustainable in 2010 was lent even more debt to become even more
unsustainable. The chickens come home to roost in 2013, post
IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding
bailout! What Angela in Germany was alluding to was what all in the
know, well… know, and that is that Ireland is already in default and
those defaults have been purposely pushed out until 2013. Angela simply
(and wisely from a local political perspective, although unwisely from a
global geopolitical standpoint) admitted/suggested was that the
defaults will be pre-packaged and managed ahead of time. The EU
politbureau insists that politics rule the day, and no prepackaged
structure be in place for the Irish defaults to be. This means the
potential foe even more carnage through the pipelines of uncertainty!
The Mathematical Truth Concerning Portugal’s Debt Situation
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 Collapse!“. 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 by Maturity Extension – 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 by Maturity Extension & Coupon Reduction
– 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 by Zero Coupon Rollup – 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).
- Restructuring by Maturity Extension – Under this
The scenarios above were also
calculated using the haircuts necessary to bring debt to GDP below a
pre-selected level (user selectable in the model, 80%, 85% or 90% -
please keep in mind that a ceiling of 60% was necessary in order to gain
admission into the Euro construct). 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 A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina).
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 "Restructuring by Maturity Extension″ scenario described above…
And this is the depiction of new debt to be raised from the market before restructuring…
And after using the scenario “Restructuring by Maturity Extension″ 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...
Online Spreadsheets (professional and institutional subscribers only)
- Portugal's Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy - Professional Analysis
- advertisements -
i did not know that Montenegro and macedonia used the euro
i like the sound of
reggie's flaming sword of truth rating agency
greece would be rated at 5 swords with portugal close behind on 4
hehehehehe
Once you are in hock you end up in the dock. Reggie should open a chic rating agency where the likes of DSK can come and enjoy a good glass of wine, a plate of pasta, and then check out which domino will fall next. It seems so easy when you have money to ride the surf of sovereign debt; as those chumps make your speculative play look as easy as taking candy from Syntagma Square baby. Lots of countries to rape...if you have the right input from the smart guys of Reggie's pasta and wine rating/bet placing parlor.