Portugal

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...

And so, Portugal flatlines, and in fact is inverted in the outer years. The bond market is waving goodbye to Portuguese paper which is now effectively trading on the Pink Sheets.

From S&P, although nothing new here. EURUSD does not even blink on the news: "Given Portugal's weakened capital market access and its likely considerable external financing needs in the next few years, it is our view that Portugal will likely access the EFSF and thereafter the ESM. While we believe Portugal's public sector debt trajectory could start to decline in 2013, thereby creating the possibility that Portugal may be able to obtain ESM funding without being required to restructure its debt (based in part upon our reading of the "sustainable path" language in the EC's concluding statement), the issue of subordination remains. We are therefore lowering our sovereign credit ratings on Portugal to 'BBB-/A-3'. The negative outlook reflects our view that the macroeconomic environment could weaken beyond our current expectations and that a political impasse could undermine the effective implementation of Portugal's adjustment program, leading to non-negligible policy slippages."

More bad news for Portuguese bonds which just traded at lifetime high yields. From Moody's: "We are lowering our long- and short-term counterparty credit ratings on the five Portuguese banks and two related subsidiaries that we rate. The long-term ratings remain on CreditWatch with negative implications. The negative CreditWatch implications reflect the possibility of a further sovereign downgrade, which we expect could take place as early as this week, and its direct and/or indirect impact on our view of Portuguese banks' creditworthiness."

And another major hit for all those still unlucky enough to own Portuguese bonds: "Following S&P's lowering of its sovereign credit ratings on Portugal to BBB on Friday 25 March 2011, RepoClear participants are advised that with effect from Monday 27 March 2011 Portuguese Government bonds will no longer be eligible for delivery in any of the RepoClear €GC Baskets. Until today’s downgrade Portugal had been eligible for the single A €GC Basket." Luckily, Portuguese bonds are still eligible for trading on OTC/Bulletin Boards, where the bid/ask will soon be greater than the actual bonds price.

A little closer to home....

In a very unsurprising move, Fitch just downgraded Portugal to A-, is on Rating Watch Negative, and may be downgraded further. Nobody cares since everyone knows all too well Europe is pretty much insolvent. In fact we are shocked the EURUSD is not at 2.00 on the news.

Earlier today Portugal had a deplorable bond auction of €1 billion in 12 month Bills, which saw the interest rate paid jump to nearly 4.5% even as general demand indicated by Bid to Cover plunge from 3.1 to 2.2. And even so, the bulk of the purchasing was from Asia, read China, as the last thing Japan needs now is to rescue a insolvent Portugal, according to a finance minister disclosure. From Reuters: "The 12-month T-bill yield rose to 4.331 percent from 4.057 percent in an auction on March 2, in line with analyst expectations of around 4.3 percent and with the secondary market. It also stayed below record levels seen in December." Alas, while Portugal purchased a few days of funding, it merely confirmed that it is now effectively bankrupt as paying 4.3% for 12 months worth of debt indicates the Rubicon has long been passed. Look for Portugal to be bailed out any minute. And in attempting to avoid the same fate, Belgium decided to "postpone" its own bond issuance of 6 year benchmark notes on concern investors will puke all over the paper. "Belgium delayed the sale of a new six-year benchmark bond on Tuesday due to market volatility caused by the Japan earthquake and explosions at a nuclear power station there. Plans to issue the new bond, maturing in June 2017, were announced on Monday, with Deutsche Bank, KBC Bank and Morgan Stanley mandated as joint bookrunners. The markets are so volatile at the moment and attention is concentrating on what is happening in Japan," debt agency chief Anne Leclerq told Reuters." Luckily unlike Portugal which has no choice but to raise debt at every opportunity, Belgium has the choice to await greener pastures. For now.

It seems there is just one market which the Fed is either unable, or unwilling to manipulate: that of Portuguese (and generally peripheral European) debt. And for good reason. As the WSJ reports, Portugal started the year with about €4 billion in cash: "Fresh borrowing and other public transactions suggest Portugal has this
year likely increased that number to around €4 billion. The official
said in an email that the figure had risen but didn't elaborate." There is one small problem: the country has a €4 billion outflow on April 15... and has to pay down €20 billion worth of debt maturities and budget deficits through the end of this year! Where the country will get this money... nobody knows. Just BTFD. But not in Portuguese bonds. As the charts below show that is still the only asset that can't find a greater idiot.

It's a day ending in Y. Meaning it is time for the ECB to go ahead and sweep another billion or so Portuguese bonds under the rug. Because you can't have the 10 Year yield at all time highs (as in yesterday) and for that relentless stream of lies emanating from every ECB bureaucrat's orifice to be taken seriously, can you. We give the ECB another month before they realize what the SNB figured out long ago: it's best to give up when it comes to direct market manipulation. We are confident Portuguese bonds will hit another all time high yield by the middle of next week. And at some point European taxpayers may just ask what all their money is being spent on.

And so the first European domino, following in the footsteps of Greece and Ireland from 2010, is made known. Per Reuters: "European Union member states are increasingly concerned about Portugal's ability to fund itself in financial markets and believe Lisbon will have to seek a bailout by April, a euro zone source said on Thursday. The EU has a rescue plan ready for Portugal, but it is dependent on Lisbon asking for the aid and making that request to both the EU and the International Monetary Fund. Portugal remains adamantly opposed to asking for assistance. "Portugal is drowning. It's not going to be able to hold on beyond the end of March," the euro zone source said. "That's already understood to be the case in financial markets, but now it's also understood among (EU) finance ministers." Time for that European Stress Test v2 to convince us just how good everything is. As for Birinyi's S&P target, we are firmly convinced that that will be attained within a year: it is hardly a coincidence that a moonlighting Gideon Gono has been seen operating the Fed's POMO desk on those days when the hunogver NYU interns are out on Stabucks runs.

Just in case someone fell for Van Rompuy's earlier joke that "the euro is a stable currency with strong fundamentals", and/or was wondering what the reason for repeating this particular lie once again was (now if we was talking about the CHF, we would certainly believe him), look no further than Portugal. The one story that nobody continues to talk about, and which will come to a head in less than 2 weeks, as Knight Capital made clear previously, continues to get little coverage, and despite hopes and dreams of some miraculous EFSF rescue mechanism (which will prove woefully inadequate once the chips start falling), spreads are leaking. Oddly enough, the ECB has not stepped in yet to shovel another €1 billion worth of decomposing sovereign bonds under the European rug. Perhaps it is time to refresh on that huge surge in borrowings under the Marginal Lending Facility, and for someone at the ECB to explain just why and how this happened.

Gold, and particularly silver, lease rates (see chart) have been rising recently. The rate is found by subtracting the silver forward offered rate from the London Interbank Offered Rate (LIBOR). This likely signals increasing tightness and illiquidity in the bullion markets (as recently said by Sprott Asset Management, and UBS yesterday). The rise in silver has been very sharp, having gone from 4.29 basis points (0.0429%) to 77.65 basis points (0.7765%) since the start of the year (31 December 2010). While the rise is very sharp, it is important to put it in context, and silver lease rates remain well below the levels reached after the Lehman Brothers systemic crisis in late 2008 when silver lease rates surged to 2.5%. At the same time, the very small silver bullion market is clearly under strain as seen in the continuing backwardation. This clearly shows that demand for physical is robust, evident from retail demand in the US where there were record US Mint silver eagle sales last month. There are delays (3 to 4 weeks) to get branded LBMA silver bars (100 oz) in volume.