This page has been archived and commenting is disabled.
The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Showing Exactly How and When It Should Happen
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.
For those who wish to skip my market commentary and feel you may
already understand how to interpret the output of the restructuring
model, go straight to the haircut analysis by simply clicking this link and scroll to the bottom until you see the live spreadsheet. For the rest, let’s start by looking at it from the German’s perspective as reported in Bloomberg: Germany Snubs Pleas to Boost Aid, Sell Joint Bonds
Germany rejected calls to increase
the European Union’s 750 billion-euro ($1 trillion) aid fund or
introduce joint bond sales, signaling its refusal to bear extra costs to
stamp out the debt crisis. With European finance ministers gathered in
Brussels today for their monthly meeting, German Chancellor Angela Merkel
rebuffed pleas from Belgium and central bankers to boost the emergency
fund to save countries such as Portugal and Spain from falling prey to
speculation. “Right now I see no need to expand the fund,” Merkel told
reporters in Berlin. She said EU treaties bar joint bond sales, which
might force up Germany’s borrowing costs, the lowest in the euro area.
European political discord pushed down bonds in Spain and Italy today,
reversing gains made last week after purchases by the European Central
Bank briefly eased concern about the spreading crisis. The ECB bought
the most bonds in a week since June, according to a statement today. The
yield on Spain’s 10-year notes climbed 9 basis points to 5.08 percent
as of 5 p.m. in London. Italy’s yield rose 7 basis points to 4.47
percent. The euro halted a three-session rally, dipping 1 percent to
$1.3283.
The attempt to affect a global market in bonds long term by
purchasing bonds short term is a futile effort and a total waste of
resources – as we can all see.
‘No Credibility’
Europe has “no credibility” in ruling out debt restructurings, Kenneth Rogoff,
a Harvard University professor and former International Monetary Fund
chief economist, said in a Bloomberg Television interview broadcast
today. “Greece will be very lucky to avoid restructuring, Ireland,
Portugal — they’re just in denial, saying it can’t happen. They really
haven’t drawn clear lines, they haven’t really said what they wanted to
do, they haven’t really made choices.”
Bingo! The professor is right on point. Thus far, it has been nothing
but words that have been given as an indication that said states won’t
default. The market forces point to default. Their track record in terms
of credibility point to default, as illustrated:
-
Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest?
- Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
The numbers show default.
- Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default… November 30th, 2010
- A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina
Only their proclamations say otherwise. Back to the Bloomberg article…
Under pressure to shield taxpayers in
Europe’s largest economy, Merkel is drifting back into the role she
played in the early stages of the crisis, when Germany held out against
an aid package for Greece. The political standoff may saddle the ECB with more of the crisis-management burden, said Citigroup Inc. economists including Juergen Michels and Michael Saunders
in London in a Dec. 3 e-mailed note. “Eventually the ECB will be forced
to increase its contribution to the rescue packages substantially,” the
economists wrote. “We expect that after another round of market
tensions, the European fiscal policy makers will eventually come up with
additional measures to fight the crisis.”
The inevitable truth of the matter is that several European states
WILL default, and default they will. If Germany, or any other economy
that still has its druthers to it decides to stand in front of said
occurrence, it will likely be dragged down as well. The Germans
apparently realize this. See this excerpt from our discussion on the
topic regarding Ireland’s prospects for default:
… ?????from the post Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor! wherein 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!
??And back to the article…
ECB Bond Purchases
The Frankfurt-based central bank said today it settled 1.965 billion euros of bond purchases last week. While the figure was the highest in 22 weeks, it didn’t include bonds bought between Dec. 1 and Dec. 3.
The bank is “actively” operating in the government bond market, Governing Council member Athanasios Orphanides said today in Nicosia. The ECB will act as necessary, said Orphanides, who heads the Cypriot central bank.
Greece won a 110 billion-euro EU-IMF
rescue in May, leading the EU to create the three-year facility that was
first tapped by Ireland with an 85 billion-euro program last month.
Both of these actions were clearly anticipated by BoomBustBlog research and analysis months ahead of time:
ECB President Jean-Claude Trichet
indicated last week that EU governments might need to top up the
emergency fund, a position echoed Dec. 4 by Belgian Finance Minister Didier Reynders.
Reynders said the IMF also wants the EU to put up more money and would boost its 250 billion-euro share. IMF spokesman William Murray declined to comment. Managing Director Dominique Strauss-Kahn is at tonight’s Brussels meeting.
All I can say is The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!
Re-Introducing the Not So Stylish Portuguese Haircut Analysis
Note: this is a repost of the information initially made available to subscribers in the summer of 2010
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 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).
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 (click this link and scroll to the bottom until you see the live spreadsheet)
by anyone with the wherewithal to click the link. This product was
formally available only to our professional subscribers, but I have
decided to distribute it much more widely. Our Ireland, Greece and Spain
(to be published within 72 hours) haircut models are available solely to professional and institutional 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.
- advertisements -
Bears? I'm a Monkey! http://www.youtube.com/watch?v=BWQ0AoO804M&feature=related
Back up, hold on, stop. IRELAND is not a foregone conclusion at this point- YES they should approve the budget, but NO they should not accept the ECB's plan, and here's their out: After the budget vote, enter an emergency order to nationalize BOI & AIB and void the ECB's offer, and at the same time protect The Pensioner's retirement funds.
Do up some fancy stuff like this on when California will default!
Reggie,
Have you done as comprehensive analysis as this for the United States? At least Ireland has a pension fund to raid! Our united States has robbed ours, and used it for everything but social security pensions. I see our problems to be far far worse than Europe. After all, who will bail us out?
+1.
Would love to see a dissection of just a few of our better-known states, and their current situation, too.
And with the utmost respect for Reggie's hard work and elegant prose, for the love of god, someone get him a proof-reader before he posts (hell, I'll do it for free!). Spell-check won't suffice, but would be a good start.
Thanks Reggie, can't wait to see your next article!
Over @ Minyanville.com they've got a good analogy w/ a lifeguard saving a drowning swimmer in the ocean. The first one is simple, second, sublime. By the 5th rescue, the lifeguard's gotta be tired, and thinking about their own safety... At what point does one decide to preserve their own hide? Who will bail us out indeed! If the rest of the developed world is drowning (bankrupt), are we going to bail out w/ Zimbabwea's currency? Germany going to save the day? China? (Gufaw!)
Damn Reggie, why aren't you the Chairman of the Federal Reserve?
Agreed, Reggie is doing some impressive work.