Even as the Euro-Dollar 3 Month basis swap has contracted to a nearly 6 month low at -75 bps, on residual hopes that the LTRO will do anything to fix Europe (it won't - just compare it to the €442 billion 1 year LTRO from June 2009 which worked until it didn't for the simple reason that Europe does does not have a liquidity problem), Europe has once again reemerged as a source of risk off (not least of all because the fulcrum security benefiting from the LTRO - the Italian 2 year BTP is for the first time in weeks wider by 17 bps). Why? The same reason as always: Greece, with a touch of Portugal. As BBG observes the positive sentiment in Asia earlier was retraced in the European session, with commodities, FX, equities lower, especially after ECB demurred from accepting losses on its Greek bond holdings. What that means is that as we patiently explained over the weekend, the imminent Greek default (just listen to Soros over in Davos spewing fire and brimstone on Europe for allowing the situation to get to a place where a Greek default is inevitable) will create so many subordinated junior tranches of Greek debt it will make one's head spin. But while the fate of Greece is all but sealed, and a CDS triggered virtually factored in (note: a Greek CDS trigger, in isolation, won't have much of an impact as repeated here before - in fact it will return some normalcy to the market as CDS will be a hedging vehicle once again over ISDA's corrupt trampled corpse), it is what happens to Portugal and its bonds that has the market gasping for air. Because as Zero Hedge pointed out first [16], a Greek default will be impossible to be enacted in Portugal in its currently envisioned format, as stupid as it may be. In fact, due to the pervasive and broad negative pledges in most medium-term Portuguese bonds, any priming Troika bailout is impossible without providing matching collateral for everyone else under UK indenture bonds!
This is critical because so far Portuguese PM Pedro Coehlo has been saying that no additional bailout capital will be needed, as the party line demands. Unfortunately, the reason why Portuguese bonds have just blown up once again today is that someone has let the truth slip and the horse is now out of the barn.
As Reuters reports, according to Antonio Saraiva, the head of the country's industry confederation, Portugal needs more bailout funds. €30 billion should do it. Great. However that means that all of the existing bonds have to get the same liens and security protections as any new IMF loan. Translation: Portugal better prepare to see itself stripped of all assets. Yet another translation: prepre to see Portuguese bonds explode as the market slowly realizes that the Greek model does not work here.
[17]
Reuters has the smoking gun:
Antonio Saraiva, the leader of the influential lobby group with vast collective bargaining powers, told Reuters the 78-billion-euro bailout that runs through 2013 did not take into account massive debts by inefficient, loss-making public companies, especially in the transport sector.
Due to Portugal's debt crisis, foreign banks have stopped refinancing those debts and Portuguese banks had to step in, depriving the rest of the economy of loans needed for it to pull itself out of the worst recession in decades. The government insists no bailout renegotiation is needed, although it added it could receive more support if external tensions kept it locked out of funding markets.
"I'll dare to say we have a credit crunch... What is lacking is 30 billion euros," said Saraiva, who has been involved in consultations with Portugal's international lenders on the progress of the bailout program.
"I think we will need a mix of more funds and longer terms to be negotiated with the troika" of lenders from the European Commission, European Central Bank and International Monetary Fund.
Saraiva's estimate adds to a warning earlier by a former government official who negotiated the country's bailout, Carlos Pina, that Portugal may need a further 20-25 billion euros in rescue funds to finance public companies.But Saraiva said Portugal would only be able to ask for more money and time after showing more effort in meeting the fiscal goals set out in the bailout to garner more credibility.
"The troika already has a much more detailed vision of Portugal than it had when the pact was signed in May. Through this vision and through the credibility we achieve by adjusting our course, the troika will be more prone to conceding this."
"Maybe before the end of this year we could manage ... to increase the sum of the assistance to at least 100 billion euros, and extend the time terms," he said, explaining that his group told the lenders last year the country needed as much as 106 billion euros in financial assistance.
He said the troika's initial evaluation of Portugal's needs was incorrect.
"When we were first consulted by the troika we defended that the state has to have conditions to reduce the debt burden of the broad public enterprise sector, allowing and obliging banks to provide this sum of 30 billion euros to the economy."
The government says no bailout renegotiation is needed as it remains focused on meeting budget deficit targets and implementing structural reforms.
"I can reaffirm that Portugal will not ask for a renegotiation of its bailout, we will neither ask for more money nor for more time," Prime Minister Pedro Passos Coelho said on Tuesday, vowing that the bailout will not fail due to internal reasons.
But he also said Europe and the IMF were ready to help Portugal if, for external reasons, it would be unable to return to debt markets as planned in the second half of next year. Saraiva said whatever the outcome of Greece's debt crisis, the European Union was unlikely to allow the disintegration of the euro zone, and Portugal would definitely stick to the euro.
Last week, the government, unions, Saraiva's confederation and other employers' associations signed an agreement on labour market reforms, designed to make hiring and firing workers easier to help struggling companies.Saraiva hailed the agreement as an important step in the right direction, but said it only "removes one part of one obstacle" for companies, while many problems such as an excessive tax burden or inefficient justice system remained.
In other words: Portugal does need more money, but under its current capital structure, there just is no place where said new money can come in cleanly and efficiently, while diluting everyone else.
Oops.