What is better than a one-front European war on insolvency? Why two-fronts of course. But not before many "soothing" words are uttered (no really). From Reuters: "Portugal's international lenders arrived in Lisbon on Wednesday to review the country's bailout, with soothing words of support likely to dominate as Europe gropes for success stories to counteract its interminable Greek headache. As the euro zone's second weakest link, Portugal's ability to ride out its debt crisis will be key to Europe's claim that Greece is a unique case. Despite a groundswell of concerns that Portugal - like Greece - may eventually have to restructure its aid programme, the third inspection of Lisbon's economic performance in the context of its ongoing 78-billion-euro rescue should make that contention clear. "The review will be all about peace and harmony," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants. "The important thing for Europe is to isolate Portugal from Greece, to put it out of Greece's way in case of a default or even an exit from the euro." That makes sense - after all even Venizelos just told Greece that the country is not Italy. And if that fails, the Don of bailouts, Dr Strangeschauble will just give the country will blessing to use a few billion in cash. Oh but wait. It can't. Because as as we pointed out in late January, and as the market has so conveniently chosen to forget, Portugal, unlike Greece, has simple, clean and efficient negative pledge language in its non-local law bonds. Which means "no can do" to any additional bailouts under its current capitalization. Which may very well mean that Portugal is stuck with its existing balance sheet unless the country succeeds in doing an exchange offer which takes out all UK- and other strong-protection bonds. All of them. And as Greece has shown, that is just not going to happen.
As a reminder:
Portugal Reenters Bailout Radar As Traders Realize Greek "Rescue" Model Is Not Feasible Here
Remember when Europe was fixed, if only for a few weeks? Those were the times, too bad they are now officially over. EURUSD is back under 1.30 in thin volume because even as we "shockingly" find that, no, Greece did not have the "upper hand" since Greek bondholder negotiations just broke down (and that over the matter of a cash coupon delta between 3.5% and 4.0%, which implicitly means that from a bondholder IRR perspective, when taking a 15 cent EFSF Bill into consideration, the hedge fund community fully expects the country to be in default even post reorg in at about two years). But it is that "other" European country which was recently junked by S&P (causing the 10 year to soar to new records), that is now the focus point of (re)bailout concerns. Reuters reports: "The euro nudges down some 20 pips to $1.2995 in thin, illiquid trade with Tokyo dealers citing renwed fears Portugal may need a second bailout. Undermining the glow of Lisbon's achievements in reforming the country's labour market is the rapidly rising market concern that it is the next potential candidate to default in the euro zone after Greece -- a point that is fast becoming clear as Athens approaches the end of its debt restructuring talks." And here is the paradox: if Greece succeeds in persuading the ad hoc creditors to accept a 3.5% coupon, which it won't absent cramdown and CDS trigger, Portugal will immediately if not sooner proceed with the same steps. There is however, a problem. Unlike Greece, where the bulk, or over 90%, of the bonds are under Local Law, and thus have no bondholder protections (a fact about to be used by Greece to test the legal skills of asset managers who can retain the smartest lawyers in the world and generate par recoveries on their bonds in due course), in a generic Portuguese Euro Medium Term note Programme prospectus we find the following:
Oops: negative pledge (a simple one at that, not that garbled monstrosity of verbiage that some Greek bonds have) and UK-law. Looks like the Greek Modus Operandi of dealing with its uber-leverage problems will be quite hindered (read impossible) when its comes to Portugal, where a substantial portion of its sovereign debt actually does have significant creditor protections. It also means good luck not only trying to enforce a coercive cram down, but also attempting to layer on a primed piece of debt with liens on top of the EMTNs (i.e. IMF bailout capital), without every asset manager in possession of these bonds suing the country into oblivion at a London court of law.
Finally look for creditors to flock to these bonds at the expense of any other bonds (Interbolsa, older issues) that do not, as we predicted over the weekend.
So much for the Greek deleveraging case study applied to other European countries: think fast Troika.
As a a further reminder...
Schaeuble Blesses Gaspar: German FinMin Promises To Rescue Portugal
In an incredibly candid 'informal' discussion caught on video by Portugal's TVi24 television crew, German finance minister Wolfgang Schaeuble gives Portuguese finance minister Vitor Gaspar 'the nod' that after the Greek deal is done, Germany will relax the conditions of the financial assistance program for Portugal. While the soundtrack is a little flaky, it is clear that the German finmin notes they must remain resolute in their conditions against Greece in order to maintain the appearance of 'seriousness' with the fellow members of the Greek parliament and more importantly the people of Germany. It would appear that once they have flexed their muscles against the Greeks (think Lehman?) then (and only then) can (and will) they 'help' the Portuguese. Perhaps the hard default is the way they expect this to play out with the assumption they can post-hoc avoid contagion in some manner but nevertheless, Samaras' comments this afternoon on growth and a focus away from austerity do not sit in any way complementary to Schaeuble's comments in this candid-camera moment.
Portuguese TV is having a field day with the clip as they note: Vítor Gaspar was "looking like a student trying to impress the teacher," was how the commentator saw the episode. Adding, the minister "did everything but say that not only is doing everything right as even very fond of the austerity policy."
The full transcript is here (via Google Translate):
Talk quietly and when the two thought not being heard, was held on Thursday in Brussels during the meeting of European finance ministers and was captured by a camera TVI. Schäuble told Gaspar that Germany was willing to relax the Portuguese aid program, but after you solve the problem of Greece. "Thank you very much," said the Portuguese Minister of Finance. Vítor Gaspar said after the German minister: "We made ??substantial progress in the European context." "Yes, they did," says Schäuble. Pedro Passos Coelho said recently that Portugal does not need more time or more money to fulfill according to the European Union and the International Monetary Fund. "Portugal will not ask for a renegotiation of the program is running. (...) He said it clearly in Parliament and I will reaffirm it: Do not ask more time or more money to implement the program, "said on January 24, during a press conference.
Transcript of the conversation in its entirety Wolfgang Schäuble: If at the end we need to make an adjustment to the program [Portuguese], having taken large deciosões about Greece ... This is essential. But then, if necessary an adjustment of the Portuguese program, will be prepared. Vítor Gaspar: Thank you very much. Wolfgang Schäuble: No problem. Since ... It is that members of the German parliament and public opinion in Germany does not believe that our decisions are serious, why not believe in our decisions about Greece. Vítor Gaspar: We made ??very substantial progress in the European context. Wolfgang Schäuble: Yes, you did progress. Vítor Gaspar: Yes, we did. And now we have to work ...
Video is not embeddable so click picture for the link...
And for everything else, there is Reuters:
The troika of officials from the European Commission, European Central Bank and IMF are expected to stay in Lisbon for about two weeks.
Portugal was hit in January by a loss of confidence after its rating was downgraded to junk by all the major credit agencies, prompting fears it would need to seek more bailout funding or even be forced to restructure its debts like Greece.
The assumption was fuelled further by comments by German Finance Minister Wolfgang Schaeuble, who said last week Germany was ready to "adjust" Portugal's loan programme.
But the experts from the troika, fresh from encountering Athens aflame in protests against further austerity measures, are likely to emphasise Lisbon's success so far in cost-cutting and economic reform that have sparked a deep recession.
"A principle theme of this mission, in terms of communication, will be to underline that no renegotiation of Portugal's programme is on the table," said a source close to the troika.
Portugal has been rewarded in the past two weeks with falling bond yields - after they hit euro-era peaks in January - and on Wednesday it carried out its largest debt auction since it first requested a bailout last year.
But the country's benchmark yields remain worryingly high, with 10-year bonds trading at a touch over 12 percent on Wednesday.
The troika will be mindful that if further austerity is foisted on Portugal, the relatively modest economic contraction seen at 3 percent this year could deepen, undermining fiscal improvements like in Greece.
Finally, the only thing better than a two-front "war", is a three-front one. Which too is coming shortly.
The period of transitory peace in Europe is coming to an end.