Greece is now yesterday's news. The only question is if, and when, Portugal will follow in the Greek footsteps. SocGen explains, answering key "client questions."
From Michala Marcussen:
Will Portugal follow Greece? Portuguese bond yields have increased on the back of downgrades and fears that Portugal will follow in the footsteps of Greece. Under the current EU/IMF program, Portugal is due to return to market funding in 2013. For this to become realistic, 10-year bond yields would have to decline substantially from the current level of 15.1%. In our opinion, the Portuguese government will bite the bullet and deliver deep reaching structural reform and austerity in 2012. The risk, however, is that even a successful program may not be enough to secure a sufficient decline in bond yields. That would leave only two options (1) a second official package or (2) PSI. A firm commitment from euro area policymakers that Portugal will not see PSI and, if necessary, funds would be made available would clearly be helpful and push bond yields lower (and thus reduce the risk that an official second package would be needed!). MARKET ISSUES: The ECB warned on the dangers of Greek PSI and have been proven correct. Until clear commitment is given by euro area policymakers on Portugal, market nerves are likely to remain on edge.
As a reminder, as both Zero Hedge, and subsequently Mistubishi UFJ warned, Portuguese bonds issued under UK law represent a far greater amount of the total notional outstanding than in the case of Greece, making a simple CAC stripping virtually impossible. And since the "UK bonds" have a negative pledge, option (1) the "official package" become next to impossible, as numerous bonds have a "negative pledge" covenant making priming loans (aka a Troika DIP) next to impossible. Good luck providing Portugal with incremental capital, if the collateral has to be allocated pro rata to the entire existing balance sheet. Alas, this most critical question was not answered by SocGen, which simply means that its "clients" have no idea what the right questions even are...
They'll find out soon enough.