Portugal

Today, in a much anticipated outcome, Portugal will vote to replace the caretaker Prime Minister Jose Socrates with opposition center-right Social Democrat Pedro Passos Coelho. Alas this is largely a symbolic vote as the new guy is just a continuation of the policies of the old guy: "Passos Coelho, who cast his vote at a polling station in Amadora on the outskirts of Lisbon, where reporters by far outnumbered voters, said Portugal had to stick to the bailout terms to regain market confidence and return to growth." Even the young people understand this: "Ricardo, a voter in his late 20s, expressed a common view that any new government just has to march to the beat of the lenders' drum. "I think the election won't bring anything new because it's the IMF in charge of the country now ... Any party that gets to the government will just have to follow IMF rules, " he said." Spot on. And we wonder how long before Mohamed El-Erian, or some other actual thinker, has an op-ed discussing the pitfalls of what we have now trademarked as "The Congress of Berlin 2.0: the scramble for Europe."

Gold and silver are flat in US dollars but higher in euros this morning. Trade is thin with the UK and US markets closed for spring holidays. Gold and silver were 1.75% and 8% higher last week and the precious metals and especially gold appear to be on solid footing due to the continuing debt crisis in Europe and concerns about a slowdown in the US and global economy. Despite gold being only some 2% away from the record nominal highs seen at the end of April ($1,563.70/oz), sentiment remains lackluster at best with little or no coverage of gold in the international financial press and media over the weekend. In the last two weeks we have experienced a lot of sell orders and the ratio of sell to buy orders has been the highest since our foundation in 2003. Value buyers emerged last week but much of the buying was by existing clients adding to their holdings. The threat of sovereign default and contagion increases by the day.

And so the stealthy campaign by Europe to asset strip its debtor prison nation continues. After on Saturday it was made clear that Europe will force Greece to issue an effective DIP loan ahead of its own bankruptcy, collateralizing post-petition creditors, and pushing existing sub noteholders lower in the cap structure, so the same scheme will now be used by Europe to grant Portugal rescue funding in exchange for Finland's "agreement" to help save the country. Per Bloomberg: "Finland will back a bailout for Portugal provided the third euro member to require aid in 12 months agrees to conditions including state asset sales. In addition, Finland wants a guarantee that bailout donors will get their loans repaid before private investors, he said." Which simply said, means that as PIIGS, already held hostage by a monetary union which threatens with world extinction should it be unwound, and by bankers who promise to never lend money should they be forced to take even once cent in senior debt impairments, will next be forced to literally sell themselves off at n blue light special auctions, where the liquidation sale biggest bidders will be none other than the very same financial institutions who have put these countries in their terminal predicament. Incidentally, all this is coming to municipalities and local governments in the US very, very soon.

Just a ROFL-inducing headline from Bloomberg for now:

• PORTUGAL OPENS CRIMINAL INQUIRY INTO RATING AGENCIES

Are blogs next?

Now that Greece and Europe are hanging on by a thread with relations frayed beyond any chance of reconciliation, all eyes move to Portugal which will soon see "speculative" articles written about it by Der Spiegel as Europe's bloodlust moves from one PIIGy to another. Below we present Portugal attempt to preempt popular hatred of being on the bailout wagon by releasing what can only be described as the most pathetic, see thru propaganda video conceivable.

Almost a year to the day from the first Greek bailout, we thought we would revisit just how successful Europe has been in masking its pervasive insolvency, and just how far Europe has ultimately gone over the past year. As the chart below shows, pretty far. Especially if one measures the displacement by the shift in the Greek bond curve whose 3 year point just passed 18%. Buy it, hold it for 5.5 years and double your money.

Who would have thought permanent austerity and a government crisis would lead to popular unhappiness. Well, the General Confederation of Portuguese Worker, better known as Portugal's largest union, for one. From Reuters: "Portugal's largest labour union is considering calling a general strike as it steps up protests against painful austerity measures that are expected to deepen under an EU/IMF bailout, its leader said on Thursday..."A general strike is an instrument that is on the agenda."" And with 725,000 members, and the certain shutdown of the Portuguese economy that would ensue, it is perhaps time to consider what will happen in Spain and soon all of Europe as the wave of austerity started almost a year ago spreads, and what the impact to European GDP (and thus global) will be. But most importantly, where will the credit money come from to push the world from this latest imminent downturn. After all Jon Hilsenrath telegraphs to us that there will be no QE3. And who are we to disagree.

And you thought the EU bailouts were a mess?

Two weeks ago, we when we disclosed the most recent expansion in the IMF's funding with the announcement of the activation of a "Special Funding Pool" we predicted:  "Bottom line: there is a new threat to the international monetary system which means Europe May 2010 redux is imminent. US taxpayers: our condolences." Alas, as tends to happen in these cases, we were right. The IMF, whose number one source of funding is you, dear US taxpayer, has just received a bailout request from Portugal. 

Following yesterday's bailout request by Portugal one would have expected that the Portuguese bond curve would tighten at least a little on some short covering in rates. One would be wrong. Except for a tiny tightening in the short-end (sub 1 Year), Portuguese rates have actually deteriorated across the curve with roughly a 0.075 widening in all points east of the 2Y. Is it time to pull an Ireland and start pricing in Portugal bailout #5?

Update: It's Official. Portugal is Bankrupt:  Portuguese finance minister says the country will have to use European Union mechanisms to resolve its debt problems, to make announcement at 8PM.

In the biggest shocker to come out just hours before the ECB's announcement tomorrow, which many see is a guaranteed rate hike, Journal de Negocios has just announced that according to the Portuguese Finance Minister, the country needs a bailout, after weeks and weeks of Greece-style denials. And yes, nobody could have foreseen this, and all that jazz.

If you really don't think a Pan-European bank collapse may be in the cards, you really haven't been paying attention. Things are coming to a had much more quickly than even I anticipated, and you know I'm far from optimistic in this regard.

Earlier today Portugal, by the skin of its teeth, sold €1 billion in 6 and 12 month Bills, which however may be its last auction before the country is forced to beg for a bailout: the yield on the 6 Month bill rose from 2.984% three weeks ago to 5.117%, while the 12 Month surged from 4.311% to 5.902%. This is simply a ridiculous yield and at this rate pretty soon the country will be paying more to issue Bills than Bonds. "I suspect that as far as the market is concerned, funding at these levels can only be viewed as a temporary measure," said Peter Chatwell, rate strategist at Credit Agricole. "There has been a very important signal from the
banks for the future," said BNP Paribas analyst Ioannis Sokos. "Portugal
can still make it through April, but probably won't get to June without
a bailout." Which incidentally is when the country is going to have new government elections: cruising through a period of insolvency without a man in charge is probably not the best idea. But what is worst is that the country's social security fund is once again rumored to have been a buyer of last resort. Since these bonds will eventually default, Portugal's pensioners will not be happy to find out that a notable portion of their retirement capital will soon be wiped out.

Portugal’s downgrade has sent markets negative this morning, with more tightening in China and rising oil prices not helping the situation. Republicans in the House of Representatives today will release a budget plan set to shave off $6T from President Obama’s plan through the next ten years. The proposal will include a phase out of Medicare and an overhauled tax code. During a speech yesterday, Fed Chairman Ben Bernanke described the U.S.’s current level of inflation as “transitory.” The European Commission has reported that no short term loans would be made available for a country without a full rescue fund request, thus it remains to be seen whether loans can be made without austerity measures being accepted. The news was sobering for Portuguese government officials that have been calling for a bridge loan to get them through steep upcoming maturities. Tomorrow will see the first of five T-bill auctions designed to push the country through upcoming maturities and is planned to raise between €0.75B and €1.0B. PMI data out this morning. China saw another 25bp interest rate hike today. The 1Y lending rate now stands at 6.32% and the 1Y deposit rate at 3.25%. Further tightening is likely.

As I warned last year, Portugal is on the verge of getting bailed out. Just like its already bailed cousins in insolvency, Greece and Ireland, Portugal declared to the very last minute that they didn't need, and would not ask for a bailout. Credibility is the key!!! What many may be missing is that the cause of all of this mess is the overleveraging of banks into over valued real estate. The default or restructuring of debt in Portugal, Greece or Ireland (or realistically a combination that may include larger countries) will spike rates that will make the 2008 real estate crash look like a bull rally. Here's the lay of the land...