Hedge Fund Slams Portuguese Bonds With 64 Page Slideshow

Tyler Durden's picture


Traditionally, hedge fund managers that go public with multi-page slideshows bashing this or that asset, usually end up in tears (see Bill Ackman) as long as said asset is not some microcap, illiquid stock. That, however, has not stopped David Salanic of Tortus Capital Management to not only mass distribute a presentation highlighting his latest and greatest short idea but to create a website that implicitly highlights his investment thesis. The site in question is called http://rehabilitatingportugal.com/, and the asset that Salanic is bearish to quite bearish on, are Portuguese bonds.

Of course, slamming Portugal bonds on the day when the country returns to the capital markets by selling its first €3.25 billion 5 year bond offering (which as Bloomberg reports was nearly 4 times oversubscribed) at 330 bps over midswaps in the post-bailout era, makes it doubly risky. That said, the herd momentum is always fickle, and what everyone is buying today may be dumped en masse tomorrow. And Tortus' reminder that nothing has been fixed in Portugal, and in fact that the country desperately needs a Greek-style PSI debt exchange which wipes out a portion of the country's debt, may be just that catalyst. Or then again, a la Ackman, the market may just ramp Portuguese bonds even higher and force Salanic to cover at a major loss (assuming he has exposure).

Either way, the market will decide. Or whatever passes for a market these days.

Cutting to the chase it, Tortus' underlying thesis is simple: Portugal's situation is not sustainable because it is drowning in debt...

... And it is. But so is every other European country when one adds up all the "adjusted" if all too real, debt figures. What makes Portugal so special?

* * *

Below is the verbal summary of the Tortus presentation:

Portugal’s Status Quo Is Not Sustainable

  • The Troika Calls the Portuguese Program “On Track” But It Is Actually Very Much “Off Track”
  • The Troika’s Forecast of Falling Debt/GDP Starting 2014 is Wishful…
  • …but Not Attainable Because “Kicking the Can Down the Road” Has Made the Problem Worse
  • Portugal’s Government Bonds Are Subordinated To A Mountain of Debt…
  • …but the Troika Program Had Protected Portuguese Government Bonds Until Now…
  • …And Now The Portuguese State Is Left to Issue Excessive Levels of Debt in the Markets…
  • …While Competing With Portuguese Banks and Corporations For Funding…
  • …And As Fundamentals Start To Matter the Capital Market Window May Face Pressure
  • Portugal Has Excessive Public and Private Sector Debts, Highly Financed by Foreigners...
  • …Which It Can Neither Outgrow Nor Devalue
  • The Alternatives For Portuguese Workers Are Lower Pay or Fewer Jobs…
  • …Putting the People In Precarious Financial Positions
  • Portuguese People Unfairly Carry The Full Burden of The Adjustment While Speculators Profit…
  • …which Has Caused a Loss in Political Consensus…
  • …and Forcing the Constitutional Court to Reject the Government Budget Repeatedly…
  • …to Restore Some of the Lost Equality
  • High Debt Is Also Killing the Corporate Sector…
  • …As an Increasing Majority of Portuguese Corporations Cannot Sustain Their Debt Burdens…
  • … Leading to Continuously Lower Investments and More Aggressive Accounting
  • The Long-Term Growth Outlook Is Even Bleaker


Portugal’s Sovereign Debt Is Not Sustainable

  • Debt/GDP is the Most Commonly Used Metric…
  • …and Portugal Ranks Poorly on that Metric…
  • …but the Debt Burden Matters More…
  • …and Portugal’s Debt Burden is Too High…
  • …Especially Considering its Inability to Further Increase Tax Rates…
  • …Or Cut Government Expenditures.
  • The Debt Servicing Capacity is Low…
  • …However Growth & Structural Reforms can Increase Debt Servicing Capacity…
  • …But Only Enough to Service 70% of the Existing Debt Outstanding…


Portugal Already Benefits from Extraordinary Levels of Solidarity

  • Portugal Already Benefits from Very Generous Fiscal Transfers from the European Union
  • Euro-Area Central Banks Are Providing Significant Funding through the Target2 System
  • The ECB’s LTRO Program Finances 9% of The Portuguese Bank’s Liabilities
  • The ECB Already Purchased 11% of Portugal’s Sovereign Debt and 23% of its Bonded Debt
  • The EIB Has Lent More Funds to Portugal than to Any Other Country Relative to GDP
  • The European Rescue Funds EFSF and EFSM Represent 22% of Portugal’s Sovereign Debt
  • The IMF Already Represents 12% of Portugal’s Sovereign Debt
  • Europe Has Already Given Portugal an OSI Without Asking for Concessions From the Private Sector


Common Misconceptions

  • Misconception #1: Portuguese Growth Has Turned the Corner
  • Misconception #2: Exports Can Save Portugal
  • Misconception #3: Portugal’s Bond Exchange Was A Success
  • Misconception #4: A Portuguese PSI Would Lead to Portuguese Bank Recapitalizations
  • Misconception #5: A Portuguese PSI Would Create Contagion Risk
  • Misconception #6: Portugal Is Not Hiding Debt
  • Misconception #7: The Greek Sovereign Restructuring (PSI) Was a Mistake

And there you have it. Full presentation below - for the sake of Tortus let's just hope Icahn doesn't take the other side of the trade (pdf).

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Thu, 01/09/2014 - 12:43 | 4315604 Mercury
Mercury's picture

Under "common misconceptions" I don’t see anything about how crap Portuguese bonds can’t/wont be swapped with some European Authority for 100 cents on the Euro.

Thu, 01/09/2014 - 12:45 | 4315630 Occident Mortal
Occident Mortal's picture

Salanic didn't get the memo... Portugal is now a district of Germany.

Thu, 01/09/2014 - 13:20 | 4315818 OutLookingIn
OutLookingIn's picture

If it smells like crap.

Looks like crap.

Then it most probably is...

Thu, 01/09/2014 - 12:45 | 4315637 youngman
youngman's picture

Why anyone would buy them at any price amazes me....these governments have no money...not enough income...but they still want to spend more than they take in.....this has to stop

Thu, 01/09/2014 - 12:54 | 4315682 Colonel Klink
Colonel Klink's picture

That which can't be sustained, won't be.  It just takes a damn long time when talking about governments.

Thu, 01/09/2014 - 12:46 | 4315641 sbn
sbn's picture

We're f*cked up, I know, but one thing we must remember is, people get mad rapidly in herds and became lucid slowly and one by one

Thu, 01/09/2014 - 12:46 | 4315645 Max Damage
Max Damage's picture

You can say that about bonds for the whole developed world. They are all fucked.

Thu, 01/09/2014 - 12:47 | 4315651 Fuh Querada
Fuh Querada's picture

Didn't Kyle Bass produce something similar in 2009 predicting the imminent collapse of the Jap bond market?

Thu, 01/09/2014 - 12:50 | 4315662 BuddyEffed
BuddyEffed's picture

With press like this, it makes me wonder if there might be a short covering rally scheduled on this in the near future.

Thu, 01/09/2014 - 12:51 | 4315664 MeBizarro
MeBizarro's picture

Portugal isn't big enough though to break the camel's back (ECB).  Nor is Greece although both are headed towards nihilist futures with the current 'rehabilitation' schedules in place.  Personally, if I was a Portguese person under 30 and unwilling to leave for better economic prospects I would either encourage a strong natinoalist movement that was either fascist or communist.   There is no alternative otherwise although neither type of movement would get enough support as long as the extensive retiree programs largely remain in place to some degree and their larger neighbors can and will exert their will in elections to ensure the 'proper' candidates and parties are represented.  

If your Portuguese, the answer is to leave ultimately unless you almost have a revoluntionary attitude and outlook.  Ditto a Greek.     


Thu, 01/09/2014 - 12:52 | 4315667 Dr. Engali
Dr. Engali's picture

It's beginning to look like two Hedge voices are fading away to obscurity. R.I.P Fonz and Kito. may your road be paved with gold and turkey sandwiches.

Thu, 01/09/2014 - 12:58 | 4315707 Grande Tetons
Grande Tetons's picture

Not the same at all without the fonz. I guessed I joined ZH too late. 

Thu, 01/09/2014 - 13:02 | 4315720 Dr. Engali
Dr. Engali's picture

Nope, it's not the same. A lot of good voices have disappeared over the years. But a lot of good voices have shown up too. And some have come back in different form. It helps keep it fresh I guess.

Thu, 01/09/2014 - 13:21 | 4315825 forwardho
forwardho's picture

My personal favorite was Longsouplines.

His colorful prose was great.

Everything changes, it is the nature of time.

Thu, 01/09/2014 - 14:28 | 4316103 PT
PT's picture

If you find out that they have gone to another website, please let me know where it is.  I promise to just read and not clutter it up with my nonsense.  Honest!

(Just promise that no other idiots are allowed to post their crap either.) 

(and have an Explanations for Dummies page.  Sifting through Google for information can be a bitch.  On the plus side, I did everything it said and now my penis is 14 feet long.) 

Thu, 01/09/2014 - 13:01 | 4315725 Hedgetard55
Hedgetard55's picture

I liked kito, had some good insights. He was correct that the market would rip higher against all expectations if the FED announced a taper in December.

Thu, 01/09/2014 - 12:52 | 4315668 Colonel Klink
Colonel Klink's picture

The Euro was designed as a way to conquer Europe without firing a shot.  Until things come apart, then there will be shots fired when debt can't be repaid.  Same as it's ever been.

Thu, 01/09/2014 - 13:04 | 4315731 Ghordius
Ghordius's picture

nope. the EUR was designed out of the need to find a solution regarding the dollar. particularly because speculative attacks to small and medium-sized currencies - thank to funds & bank growth - became bigger and heavier

note how many small currencies are currently pegged or floored to a heavyweight. note which and to which. size matters, on this battlefield

just imagine the proliferation of ZH articles if we still had 18 currencies. think what an immense fun our beloved bankers would have. today let's short the French Franc vs the German Mark. tomorrow let's short the Drachma vs the Lira. etc. etc.

what you are hinting to is what happened very often when gold was the currency. including gunboats. sorry, this means imho that you are saying that the EUR is behaving like gold would

price stability. not everybody likes it. nope, the EUR is still working as designed. but not for the purpose you are thinking of

Thu, 01/09/2014 - 13:04 | 4315743 joak
joak's picture

The Swiss frank is pegged to what ? The Norwegian crone ? Singapore dollar ? 

Thu, 01/09/2014 - 13:09 | 4315774 Ghordius
Ghordius's picture

it has a floor versus the EUR. whenever the EUR goes down vs the CHF, the Swiss National Bank starts to buy humungus amounts of it

you know, the same national bank that has lots of gold, and this year it could not give huge profits to the Swiss States (which are it's owners) because gold is down

Thu, 01/09/2014 - 13:16 | 4315796 joak
joak's picture

Yes CHF has a floor, but definitely not to counter "attacks", but because they have healthy finances and some sound money thanks to their gold. I think that your argument of "size matters" does not stand the facts, you just said it yourself :) There was no need to create the EUR, it was just a globalist project that had little to do with Europe interests.

Thu, 01/09/2014 - 13:26 | 4315849 Ghordius
Ghordius's picture

did you ever heard of Soros and his attack on the GBP? did you ever study the problems the Deutsche Mark had whenever everybody and his grandmother was speculating on it's price vs the French and British currencies?

if the EUR is a "globalist project" (whatever that is)... why the bloody regional name? we could have called the Ducat, or whatever

was the federalization process of the US a "globalist project", too? our freshly started process of confederation is still based on a club membership model, remember?

Thu, 01/09/2014 - 13:09 | 4315769 Colonel Klink
Colonel Klink's picture

While I agree it may have been created to compete with the dollar, I still believe it's ultimate goal was to make those smaller countries subservient via debt.  I make no allusion to equate the Euro with gold, or stability.  Though it may have provided the latter for a short time.  As with all fiat monetary unions, it will disintegrate.

Thu, 01/09/2014 - 13:18 | 4315808 Ghordius
Ghordius's picture

compete? compete? how? you can't compete with the USD. it's armed to the teeth

adapt to it's moods and swings is more appropriate. Yin and Yang. King Dollar and Princess Euro

of course, as soon as the Sun King does not rip everything apart with it's powerful tides, the need for the EUR will abate

the ECB is after all only a confederation of national banks. 18 tested, historic & known currencies that could be set online in a weekend

yet if I would bet on it, I'd say the EUR would still continue as long as there is debt denominated in it

just imagine for example if Germany (or Portugal) would exit. half of it's economy would still have a need for the EUR. it's either that or switch to the USD or... the horror! to the Yuan

Thu, 01/09/2014 - 13:26 | 4315847 Colonel Klink
Colonel Klink's picture

Are we living on the same planet?  Compete, as in large competing currency based upon the "Euro Zone" with regards to GDP.  Compete as in OIL contracts being priced in Euros.  Not that the US hasn't tried to solve that militarily a few times.

Guess we'll have to agree to disagree.  But thanks for the debate.

Thu, 01/09/2014 - 13:37 | 4315876 Ghordius
Ghordius's picture

just a different perspective. from here, it's simple: exports have to match imports in value, or slightly exceed them (because of support for the hegemon and assorted financial aspects)

the specifications for the eurozone. and the reason why the British Pound can't and won't join

just as a reminder to our anti-"globalist" friend: it was Nixon who "opened the door to China". globalization was first driven by the British Empire and than by America. our role (on the european continent) is limited. we hosted two world wars just to clear that

the real I'm-here-to-fight-it-out currency might be soon the Yuan

Thu, 01/09/2014 - 13:38 | 4315914 Colonel Klink
Colonel Klink's picture

We do agree on several points.  Good day to you Sir!

Thu, 01/09/2014 - 12:52 | 4315669 ebworthen
ebworthen's picture

If this is what brings down the Euro and the EU fantasy I'm happy.

Thu, 01/09/2014 - 12:57 | 4315698 Colonel Klink
Colonel Klink's picture

I'm wit you Ebs!  Whatever it takes, then hopefully it takes the rest of the stuff with it (Yen/dollar).

Thu, 01/09/2014 - 12:53 | 4315675 Skateboarder
Skateboarder's picture

Portugal's biggest export is Cristiano Ronaldo's crying.

Thu, 01/09/2014 - 12:57 | 4315702 sbn
sbn's picture

And cork

Thu, 01/09/2014 - 13:01 | 4315730 Hedgetard55
Hedgetard55's picture

Portugal still makes great wine, sweetbread, and linguisa.

Thu, 01/09/2014 - 13:02 | 4315735 joak
joak's picture

What is amazing is that they need 64 pages to make this point. This said, Mr Satanic chose a very easy target, the same is valid for bonds issued by 95 % of the countries around the world.

Thu, 01/09/2014 - 13:05 | 4315751 SAT 800
SAT 800's picture

I don't think I was in danger of buying any portuguese bonds, anyway, but thanks just the same.

Thu, 01/09/2014 - 13:07 | 4315756 JustObserving
JustObserving's picture

No debt is worse than the US with US debt and unfunded obligations at $1,260,000 per taxpayer and rising at $70,000 per year.

But Obama may drone you or the NSA may put child-porn on your computer or wipe out your bank accounts if you speak the truth.    Easier and safer to pick on Portugal.  

Thu, 01/09/2014 - 13:21 | 4315826 Watson
Watson's picture

All you need to know is that Merkel has been re-elected, and she really believes in all this United States of Europe stuff. So her taxpayers will be stuffed long before Portuguese bonds pay less than 100 EUR-cents to the EUR.
So shorting Portugal looks foolish.

If you want a weak target too big for Germany to backstop, try Italy or France...


Thu, 01/09/2014 - 13:54 | 4315986 TrustWho
TrustWho's picture

Attacking the Central Banks' policy since 2009, this is the ZeroHedge argument about this financial farce. Banks and bank regulators treat sovereign debt obligations/paper as equivalent to cash with sovereign debt paying interest. If sovereign debt, especially USA debt, has risk, or worst defaults, the system collapses. Will Germany allow Portugal to default? David Salanic needs to think, as Jon Corzine made the opposite bet and still loss. Someone at Goldmann had some sweet revenge!

The real evil of Central Bank policy is this: Why would anyone loan money to some Portugese vendor when they can leverage their bet with "free money" and buy Portugese bonds?


Thu, 01/09/2014 - 18:27 | 4317196 Haus-Targaryen
Haus-Targaryen's picture

This makes me happy.  I look forward to the day when the Euro splits in half.  


Neuro!? Thaler!? Mark?  Kroner?  Don't really care what it is called, but this Germanic/Latin "best friends for life" nonesense is just getting ridiculous. 

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