Wednesday, March 9, 2011
Portugal's Bonds are a Free Lunch
By GRANT DE GRAF
"Greece, Ireland and Portugal may revert to a domestic currency."
What has become very clear, is that the appetite for Portuguese bonds remains solid. Portugal’s Prime Minister Jose Socrates continues to support the country's commitment to access finance through the open market. Seemingly, policymakers wish to demonstrate the absence of an emergency situation. This may in deed reflect the economic dynamics that prevail in Portugal: that the challenges are surmountable.
Investor's are the winners at these bond auctions, as the risk premium that the market is dictating appears somewhat of a free lunch. Given the potential support that Portugal enjoys from the EU and the lack of any hidden debt exposure that was evident in the Greek and Irish bailouts, it is surprising that the market has priced in a premium that appears overly aggressive. The extent of the Irish and Greek bailouts in numerical terms, and the possibility that the European Central Bank may cut the chord are risk factors that investors have discounted in those specific instances. Portugal is different. The country's total debt exposure is relatively small, and the ECB could comfortably cover Portugal's total exposure, made available through a traditional credit line. Even Spain, a significant trading partner remains a creditor, and it is difficult to envisage the impact that a Spanish SOS would have on Portugal.
A more relevant enigma is the uncertainty of the plan [if any] that will emerge to implement a Portuguese recovery. It is unclear whether austerity alone will satisfy concern from investors. Securing a non-emergency long-term loan facility from the ECB to cover its debt exposure with favorable terms, would be a good start. This is not a free lunch, as Portugal is paying a price for being a hand-holder to a big brother. It needs to conform with EU austerity and policy, irrespective of suitability, or it walks.
Comments by Frank Oland Hansen, a senior economist at Danske Bank in Copenhagen, miss the point. “The recent economic performance hasn’t been sufficiently convincing and we expect that Portugal will need help soon,” he said. Other analysts suggest that the ability for Portugal to service high interest rate bonds is not sustainable and that a Portuguese emergency bailout is inevitable. It is important to distinguish between a bailout and a debt restructuring program. Further, the comments fail to grasp the fundamental issues that relate directly to Portugal's challenges. That would be the need for policymakers to formulate a blueprint, which will enhance long-term economic conditions for a solid recovery.
Another catalyst for recovery would be for Portugal to voluntarily revert to a domestic currency, while still retaining its economic ties with the EU. This way it would enjoy a competitive advantage for goods and services that it exports. Realistically, a reversion to a domestic currency appears the way that both Ireland and Greece will ultimately go. The tenacious buoyancy of the Euro in recent weeks, may be a reflection of this hypothesis. Traders are predicting that troubled countries will reject the Euro as their currency. In the long term, this approach would preserve a more bullish approach to the Euro, than may have been anticipated.
Sources:
Grant de Graf is a writer and economist who covers issues that relate to the credit crunch, business cycles, asset correlations, and the sovereign debt crisis. He is also a former trader on Wall Street, where he specialized in options and equity arbitrage. De Graf publishes his posts on his blogs, Grant de Graf and Understanding the Credit Crunch.
Tuesday, March 8, 2011
The Future of the Euro: A Symposium
The Future of the Euro: A Symposium: "March 8, 2011, 8:03 a.m. EST"
Look At This Chart, And You Can See What A Massive Blunder The ECB Is About To Make
Look At This Chart, And You Can See What A Massive Blunder The ECB Is About To Make: "Look At This Chart, And You Can See What A Massive Blunder The ECB Is About To Make"
Fitch: 60% Chance Of A Chinese Banking Crisis By 2013
Fitch: 60% Chance Of A Chinese Banking Crisis By 2013: "There's A 60% Chance Of A Chinese Banking Crisis By 2013"
Portuguese Debt Concerns Misdirected
BY GRANT DE GRAF
LISBON—Portugal has indicated its intent to operate within tight fiscal targets irrespective of the impact which high oil prices and raw materials may have on the economy, according to senior Portuguese officials.
"We have correction mechanisms that will allow us to meet the targets we have set," Mr. Teixeira dos Santos said at a Reuters-Radio TSF conference in Lisbon. "Whatever happens, we will not miss the budget targets we have established."
Investors are keeping a close eye on budget numbers being released by the country, which has pledged to cut this year's deficit to 4.6% of gross domestic product from about 7% last year. The deficit stood at 9.3% in 2009, raising fears that Portugal could default on its debt-repayment obligations.
If a disciplined approach towards fiscal policy is an ingredient towards recovery, then Portugal seems committed towards achieving that goal.
The government last year launched a series of austerity measures designed to shrink its expenditures and increase revenue, mostly through salary cuts in the public sector and tax increases.
The notion of extreme pressure on Portugal to seek an international bailout is unsubstantiated, despite reports to the contrary, amongst gossip mongers.
Mr. Teixeira dos Santos said at the conference that markets are "over-reacting" about the euro zone's capability to control its finances, although he criticized the bloc, saying it has been slow in tackling sovereign-debt problems that started with Greece.
It is still unclear as to whether Portugal's predicament is a direct consequence of the Greek and Irish Bailouts, or rather a function of a general downturn in demand for goods and services, and symptomatic of the severe economic recession.
"There is a deficiency in the euro. We don't have a common mechanism to control budgets and taxes in the euro zone," said Mr. Teixeira dos Santos. The difficulty of balancing a fiscal policy that is localized to specific regions within the EU, with a centralized monetary policy will continue to be a challenge for all countries within the EU.
Mr. Teixeira dos Santos also said he hopes the March 11 and 24 meetings of European Union leaders to discuss steps to tackle the region's debt crisis, will help stabilize the euro zone. He would be well advised to take advantage of the opportunity to seek a comprehensive loan package. This could be achieved with favorable terms and justifiable, irrespective of the absence of the emergency bailout conditions that were evident in Greece and Ireland.
Among the measures Portugal is backing for the meetings is an increase in the scope and lending capacity of the €440 billion ($605.13 billion) European Financial Stability Facility.
Although reports have indicated that a successful agreement among EU members is crucial for Portugal, this is unfounded. Given Portugal's paltry debt exposure relative to other EU countries, it is unlikely that a new agreement will have any impact on Portugal at all.
Further, critics have suggested that Portugal will be hard pressed to service high borrowing costs. Because the loans are marked in Euros and indirectly supported by the ECB, attributing higher interest rates to Portugal would seemingly be unfair. Alternatively, they should be viewed as an arbitrage opportunity in which investors achieve a higher rate of return, for a risk which might be attributable to the European Central Bank.
A more important consideration is the challenge of formulating a blueprint that will contribute towards the revival of Portugal's economy. With its major trading partner, Spain, floundering and potentially in a more catastrophic position than Portugal, this will be difficult.
Sources: http://online.wsj.com/article/SB10001424052748704615504576171884219508072.html
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