I want to see what the market sees; I need to know why "everything's going to be ok." What am I missing?
Portugal's 10-year stands at 8.58 after surging from 7.3 only a couple weeks ago; 6-month bills are at 6.5% and CDS are still at their highest level, i.e., its locked out of the market; Portugal was said to have about €4 billion cash, plus about €1 billion more from selling 6 and 12 month bills at rates higher than 10 yr. bunds; Portugal has bond redemptions and coupon payments totalling €5.3 billion this month, plus its normal monthly fiscal deficit. 1) Where is the money coming from to get through April?
Ok, assume April's bonds and deficit are paid for, and Portugal has enough cash on hand to cover its fiscal deficits from here to June. The only way to get though June's bond redemptions and coupon payments, totalling €7 billion, is with a bailout. The various "donors" still have to assess the situation, and if Ireland is a guide, the terms that would be given wouldn't be issued until the end of May. But given to who? 2) The "lame duck" parliament in Portugal does not have the legal authority to accept any bailout terms.
So that leaves everyone waiting until after June 5. For fun, lets assume that a government is able to be formed within a day of the election. That leaves 9 days with which to accept an austerity package. Consider the recent election losses by CDU in Germany and next week's Finnish elections in assessing the contents of a package; an austerity package already rejected in March is being labeled merely as a starting point in the budget reforms Portugal needs to enact to get bailout funds, with the Finnish Finance Minister stating, “The package must be really strict because otherwise it doesn’t make any sense...The package must be harder and more comprehensive than the one the parliament voted against.” 3) Is it reasonable to expect the new parliament to negotiate, debate and implement a controversial austerity package in less than 9 days, let alone at all?
That leads to my last question: 4) Could there be any funding of Portugal without strings attached through June? This begs the question, by whom? ECB? That may be a way of providing liquidity while raising rates (not sure about the mechanics of that one). China? They play realpolitik, so the question is, in exchange for what?
To recap, in order to justify the market's "they'll take care of it" view:
1) Portugal must have enough to cover this month's bond redemptions and coupon payments, as well as enough to cover fiscal deficits through June.
2) The June 5 elections take place and a government is formed quickly.
3) The new parliament is willing to implement an austerity plan stricter than one already rejected, with little debate or negotiation.
Portugal's 10-year stands at 8.58 after surging from 7.3 only a couple weeks ago; 6-month bills are at 6.5% and CDS are still at their highest level, i.e., its locked out of the market; Portugal was said to have about €4 billion cash, plus about €1 billion more from selling 6 and 12 month bills at rates higher than 10 yr. bunds; Portugal has bond redemptions and coupon payments totalling €5.3 billion this month, plus its normal monthly fiscal deficit. 1) Where is the money coming from to get through April?
Ok, assume April's bonds and deficit are paid for, and Portugal has enough cash on hand to cover its fiscal deficits from here to June. The only way to get though June's bond redemptions and coupon payments, totalling €7 billion, is with a bailout. The various "donors" still have to assess the situation, and if Ireland is a guide, the terms that would be given wouldn't be issued until the end of May. But given to who? 2) The "lame duck" parliament in Portugal does not have the legal authority to accept any bailout terms.
So that leaves everyone waiting until after June 5. For fun, lets assume that a government is able to be formed within a day of the election. That leaves 9 days with which to accept an austerity package. Consider the recent election losses by CDU in Germany and next week's Finnish elections in assessing the contents of a package; an austerity package already rejected in March is being labeled merely as a starting point in the budget reforms Portugal needs to enact to get bailout funds, with the Finnish Finance Minister stating, “The package must be really strict because otherwise it doesn’t make any sense...The package must be harder and more comprehensive than the one the parliament voted against.” 3) Is it reasonable to expect the new parliament to negotiate, debate and implement a controversial austerity package in less than 9 days, let alone at all?
That leads to my last question: 4) Could there be any funding of Portugal without strings attached through June? This begs the question, by whom? ECB? That may be a way of providing liquidity while raising rates (not sure about the mechanics of that one). China? They play realpolitik, so the question is, in exchange for what?
To recap, in order to justify the market's "they'll take care of it" view:
1) Portugal must have enough to cover this month's bond redemptions and coupon payments, as well as enough to cover fiscal deficits through June.
2) The June 5 elections take place and a government is formed quickly.
3) The new parliament is willing to implement an austerity plan stricter than one already rejected, with little debate or negotiation.
Perhaps, as Mo has explained, with Euro banks raising more capital, a restructuring of debt isn't going to bring down the banks.
ReplyDeletehttp://www.bloomberg.com/news/2011-04-07/european-debt-crisis-morphs-into-new-phase-commentary-by-mohamed-el-erian.html
Also, as Bloomberg reports:
ReplyDelete"the European Union will intrude on the political campaign by trying to broker a cross-party budget-cutting deal between Socrates and the opposition party led by Pedro Passos Coelho.
Anibal Cavaco Silva, the largely ceremonial Portuguese president, said he will play a role in forging an initial accord on an economic overhaul that will be followed up by the future government.
Interim Program
“What we need now is an interim program so the next government can participate in the final negotiations because it is the next government that is going to implement the program,” Cavaco Silva told reporters at a separate event in Budapest today. "
http://www.bloomberg.com/news/2011-04-08/portugal-may-be-forced-to-make-deeper-cuts-than-ones-rejected-by-lawmakers.html
Also, the possibility of a bridge loan funding Portugal through its June, with the real bailout coming afterwords.
ReplyDeletehttp://www.bloomberg.com/video/68477376/
As for the bridge loan:
ReplyDelete- The EC has stated they will not provide any aid, even a bridge loan, unless formally requested by a member-government that has agreed to a program of economic adjustment.
http://online.wsj.com/article/BT-CO-20110405-706441.html
- Portugal's FM states they are not seeking a bridge loan before the EU aid package kicks in.
http://www.reuters.com/article/2011/04/08/portugal-financeminister-idUSWEA363120110408
- Germany considers EFSF Plan A, and won't consider (or at least discuss) alternatives (i.e., bridge loan) while proceeding with Plan A.
http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201104060948dowjonesdjonline000403&title=germanyuseless-to-talk-alternatives-to-efsf-aid-for-portugal
- Portugal's president requested an interim program: "Lisbon had earlier raised the possibility of an emergency loan, but the European Commission turned it down, saying such an arrangement was not possible under European rules for aiding member countries in difficulty." And this laughable statement: "European Central Bank president Jean-Claude Trichet echoed Rehn's call, saying the "hard work" needed was "certainly not for public" debate, given the "sensibilities" posed by the general election campaign." And why? Because "They will have to be negotiated with Portuguese politicians facing an angry, fearful electorate in the polls. Under the terms, a "cross-party agreement" is to be "adopted by mid-May and implemented swiftly after the formation of a new government."" I.e., no debate by new parliament, only implementation of deal negotiated by old parliament. Right...
ReplyDeletehttp://www.google.com/hostednews/afp/article/ALeqM5gJ8Csfp3aqifCSd8qp-3guaDqnAw?docId=CNG.b0a588b743c7924d073b1d75bbfa6cf2.421
- "Portugal, however, has asked only for a "bridge loan," a senior EU official said.
Germany said it was "adamantly opposed" to a short-term loan."
http://www.upi.com/Business_News/2011/04/09/Bailout-talks-for-Portugal-hit-a-snag/UPI-28931302371245/#ixzz1J8QTuC7z
- Here's an interesting take on the situation...it will be interesting to read in retrospect.
http://www.wsws.org/articles/2011/apr2011/port-a09.shtml
- A more complete synopsis of the short-term aid vs. long-term aid.
ReplyDeletehttp://euobserver.com/9/32145