Portugal & Ireland Remain in Focus

In spite of an all-around outbreak of catastrophe-fatigue and dip buying (what's the worst that can happen, after all? Hasn't it already happened?),  bad news have predictably continued to percolate in Portugal. The latest twist is that prime minister Socrates, who heads a minority government, was unable to pass his austerity budget and thereupon decided  to step down.

 

Following this exit, it is speculated that new elections will have to be held, but apparently that is not yet certain, as Portugal's president will first ask the political parties whether a different coalition can be formed. In the meantime, Socrates stays on as the 'caretaker' and as such represents Portugal at the EU summit.

The most important fact here is of course that the austerity budget couldn't be passed. Although all relevant political parties in Portugal are in principle pro-austerity (they have little choice in the matter at this point), the PSD (social democratic party) disagreed with the details of Socrates' budget – it didn't want to cut socialist programs quite so much. As the FT reported on that point:


The PSD has committed itself to the same fiscal targets as the Socialist government, which aims to cut the budget deficit to 4.6 per cent of gross domestic product this year and 3 per cent in 2012, down from 7 per cent last year.

But the party, which enjoys a lead in the opinion polls, said it could not support the government’s latest austerity measures because they were likely to prove “limited and ineffectual” and demanded unjust sacrifices from “the most vulnerable members of society."

 

It appears from this that it shouldn't be relevant which government there is in charge in Portugal. Nonetheless, the markets are aware that an over € 4 billion debt rollover is awaiting Portugal in April, and the buyers' strike in Portuguese debt intensified immediately.

 


 



Portugal's 5 year yield hits a new euro era record high at  8.21%

 


 

The problem remains that the higher these yields go, the less likely it becomes that Portugal will be able to continue servicing its debt.

In the meantime, ECB chief Jean-Claude Trichet and European Commission president Manuel Barroso both chimed in, urging Portugal to 'stick to its austerity plans', which Socrates promptly promised would happen regardless of who's in charge in Lisbon.

The market's judgment so far is nonetheless that Portugal won't make it. In the meantime, Harvinder Sian at RBS has provided an initial estimate of the size of the bailout that will be required for Portugal. His judgment: € 80 billion.

That's a tidy sum, but manageable for the EFSF. It also means everybody should hope that the market's recently more benign assessment of Spain's creditworthiness proves correct.

The basic problem of course remains unresolved. While the lower interest rate offered by the EFSF means some the burden on Portugal's government finances would lessen, the experience with bailed out peripherals thus far is that their existing bonds simply continue to sell off. – in spite of repeated interventions on the part of the ECB in their bond markets.

A case in point is Ireland – just as it became clear that Socrates would fall, a rumor made the rounds that both Allied Irish Bank and the Republic of Ireland would miss a coupon payment. This was swiftly denied by the relevant functionaries and indeed seems highly unlikely at the moment.

Nonetheless, Irish bond yields found themselves at a new high as well and significantly, remained there even after the denial was broadcast.

 


 

Ireland's 5 year yield hits a new high of 10.55%.

 


 

Taoiseach (prime minister) Enda  Kenny did not press for a new deal regarding the interest rate Ireland pays to the EFSF at the EU summit, preferring to await the ongoing bank 'stress test' that will supposedly determine just how bottomless the Irish banking well really is. As reported at RTE:


“He [Kenny, ed.] rejected what he called 'extreme figures' being 'bandied about' regarding the scale of the recapitalisation needs in the sector, without specifying what they were.

Earlier, Mr Kenny said he preferred to wait for the banking stress test results before looking for changes to the EU/IMF rescue deal. He said he was more interested in substance rather than theory.

However, speaking in the Dáil today, Sinn Féin said the Government 'completely changed' its negotiation stance in advance of today's EU summit.

Mary Lou McDonald said the Coalition has now said the reduction in the interest rate for the EU/IMF deal is off the table, and that the notion of burden-sharing is 'being kicked down the road'.

She said the Government must explain why it has changed its strategy.”

 

She has a point. Kenny sounded a lot more combative about one week ago, promising that bank bondholders wouldn't be spared. Presumably his phone call with Hermann Rompuy wasn't the only one he's had since then. It is well-known that the ECB is strenuously seeking to avert haircuts for bank bondholders, no matter how utterly bankrupt the Irish banks evidently are (if it were possible, one could call them 'bankrupt several times over', i.e. creditors would likely recover absolutely nothing). The reason is obvious: firstly, the ECB would then have to come to the aid of the wounded bondholders, which in turn are mostly other banks in the euro area. Secondly, it may well be that in terms of its 'unlimited liquidity provisions' to the euro area banking system, it has ended up accepting some toxic stuff of Irish provenance as collateral itself (we have no proof for this, but it does seem possible).

Since the Irish central bank is essentially printing money by the truckload to funnel unsecured loans to the stricken Irish banks while their deposit base melts away, the goodwill of the ECB seems rather important – at least as long as Ireland remains in the currency union.

In the meantime, Ireland's bonds now require even higher margin, which Clearnet has pushed from 30% to 35%. This should continue to put pressure on the market.

We would once again note to the euro area's bailout fund that it is essentially structured like a CDO. Whether or not anyone wants a 'transfer union', should the 'sub-prime borrowers' financed by the EFSF default after all, then the lenders holding the 'senior tranches', i.e. the bonds the EFSF itself issues, will have to be satisfied via the EU's guarantees. Presto, then it is a 'transfer union', like it or not.

Among those who definitely don't relish this prospect we find Finland (one of the few countries in the euro area with an unblemished score of keeping its deficit below the original Maastricht ceiling of 3% of GDP) and of course Germany. Germany's parliament last week passed a motion directing the government not to agree to the EFSF 'buying bonds of troubled member nations'.

As the WSJ reported:


“Germany's parliament on Thursday approved a motion that explicitly asks the government to bar the euro zone's rescue fund from buying government bonds from troubled member countries.

The vote shows that Angela Merkel's government isn't in line with its own coalition lawmakers. Merkel at a euro-zone meeting last weekend agreed to a purchase of government bonds by the current euro-zone rescue fund, the European Financial Stability Facility, or EFSF.

"I am against the purchase of government bonds as that means that (the fund) is taking over new debt" from those countries, Thomas Silberhorn from the Christian Social Union, or CSU, said in a debate before the vote. "We support the negotiating line of the government, but at the same time put limits to it," he said. The CSU is the Bavarian sister party of Chancellor Angela Merkel's Christian Democratic Union, or CDU.

While the motion isn't binding for the government, parliament is needed to approve any increase in guarantees given by Germany for the EFSF.”

 

As confusing as this seems to be – it's not binding, which means they now seem to be both for and against it  – it shows the political mood among the putative paymasters. The ECB was extremely eager to get out of the bond buying business, but only partially succeeded in that endeavor (it will be stuck with buying the riskiest stuff in the secondary market, which it has so far done to zero avail).

In that sense, the project 'rescue of the euro at all costs' combined with the 'no bank bondholder to be left behind' program remains a politically fragile one from all sides. Voters are neither eager to be on the receiving end of austerity measures, nor do they want to pay for bailouts. We are likely just one global economic downturn away from the whole enterprise going up in smoke and acrimony.  It may well all hinge on how quickly China's boom goes bust or how long it takes for the markets to realize that money printing can not bring forth a sustainable economic recovery in the US (where e.g. the recently released CFNAI continues to contract – which it has done in 5 of the past 6 months – while new home sales just fell from yet another cliff).

 


 

US new home sales – another record low in this series

 


 

Below are our usual charts. As can be seen, CDS markets continue to differentiate between various members of the PIIGS club and the ancillary suspects. Correlations have not yet resumed. We strongly suspect that this happy state of affairs won't last, but it has certainly helped to 'buy time'.

As an aside, there are also some questions regarding what actually constitutes a 'credit event'. The ISDA has taken note of the fact that e.g. Ireland's IMF loan enjoys seniority over Ireland's existing government debt. This means effectively that Ireland's previously issued sovereign debt is now subordinated to the IMF's loans. While no-one can say yet how the ISDA will rule on this, it opens the possibility that accepting a bailout from the EU/IMF tag team will be deemed akin to triggering a credit event. 

 

1.    CDS (in basis points, color-coded)


 

5 year CDS spreads on Portugal, Italy, Greece and Spain. As can be seen, Portugal and Greece continue their decoupling from Italy and Spain.

 


 

5 year CDS spreads on Ireland, Bank of Ireland, France and Japan. Japan's CDS spreads are pulling back the more power lines get connected to the Fukushima Daiichi plant. It is still glowing with varying intensity and  Japan's government had to vastly increase the amount of radiation considered legally harmless, but the worst fears have luckily not been realized and that is what counts.

CDS on Bank of Ireland continue to be well supported in view of pm Kenny's recent tough talk and the upcoming 'stress test'.

 


 

5 yr. CDS spreads on Austria, Hungary, Belgium and Romania – evidently the market is no longer all that concerned about these – for now, anyway.

 



The Markit SovX Index of CDS on 19 Western European sovereigns. Still hovering above lateral support.

 


 

2.    Other Charts (note, euro basis swaps are still steady, so not really worth showing at present)


 

5 yr. CDS on our Middle Eastern Quartet, Saudi Arabia, Qatar, Bahrain and Morocco – consolidating, but somehow still bullish looking actually.

 


 

The SPX, T.R.'s proprietary VIX based volatility indicator and the gold-silver and gold-commodities ratios. Amazingly, gold-silver continues its trek lower with some verve. This was 'extremely stretched' a while ago already, but as the next chart shows, could become even more so.

 


Gold-Silver ratio, the long term view. As long as it keeps moving lower, both metals should be able to continue their rallies. Silver is of course very stretched, as the ratio implies. It is impossible to second-guess where the top in such a strong move may be eventually found, but caution seems advisable (that said, we have seen a good case being made for a technical target of $43 for silver in this move; it's not even very difficult to believe that the old all time high will act like a magnet medium to longer term).

 

Charts by: Bloomberg


 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • factoryA Striking Chart
      The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth.   What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson   Contrary...
  • trump-putin-1024Trump and Putin Narrowly Escape Assassination Attempt
      The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one.   The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
  • historical-photos-pt9-pepsi-factory-baltimore-1956-aUS Economy - Curious Pattern in ISM Readings
      Head Fake Theory Confirmed? This is a brief update on our last overview of economic data. Although we briefly discussed employment as well, the overview was as usual mainly focused on manufacturing, which is the largest sector of the economy by gross output.   Pepsi factory in Baltimore, 1956 Photo via pinterest.com   Readers may recall that we have pointed out for some time that there was quite a large gap between the data reported in regional Fed manufacturing...
  • swing-voterWhy the Fed Destroyed the Market Economy
      What Have You Done for Me Lately? Swing voters are a fickle bunch.  One election they vote Democrat.  The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon.   The primacy of the wallet.   They don’t give a rip about questions of small government or big government.  Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care.  What’s important to the...
  • time-wastersHow is Real Wealth Created?
      An Abrupt Drop Let’s turn back to our regular beat: the U.S. economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least.   Groping in the dark, Yellen-style   Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed... and that a rate hike isn’t...
  • wallet-367975_960_720Janet Yellen’s Shame
      Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers.   In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
  • warren-buffett-gold-coinGet Ready for a New Crisis – in Corporate Debt
      Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on.   The new three dollar bill issued by the Apprehensive States of America.   We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
  • 4-ip-and-non-def-capital-goods-ordersThe Economy, the Stock Market and the Fed
      John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices.   The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...
  • silkroadHanjin Marooning in San Pedro Bay
      Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years.  The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years.  In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations.   A map of the main ancient Silk Road - click to...
  • voltaireGreat Causes, a Sea of Debt and the 2017 Recession
      Great Cause NORMANDY, FRANCE – We continue our work with the bomb squad. Myth disposal is dangerous work: People love their myths more than they love life itself. They may kill for money. But they die for their religions, their governments, their clans... and their ideas.   Famous French hippie and author Voltaire. He wears the same sardonic grin in every painting, whether he's depicted at a young or an old age, doesn't matter. His real name was François-Marie Arouet; he...
  • wilsonand-morganThe Donald Versus Killary: War or Peace?
      War: A Warning from the Past Although history does not exactly repeat itself, it does provide parallels and sometimes quite ominous ones.  Such is the case with the current U.S. Presidential election and the one which occurred one hundred years earlier.   The Donald probably has the better slogan...   The dominating question which hung over the 1916 campaign was whether the country would remain neutral in regard to the horrific slaughter which was taking place on the...
  • hittite-leftoversA Rift in the Space-Time Continuum
      Weird and Unnatural NORMANDY, France – First, a quick look at the markets. The Dow bounced on Monday, recovering 239 points of the nearly 400 it lost on Friday. Why the comeback?   FOMC member Lael Brainard: her comments on Monday were touted as the “reason” for the stock market recovering half of Friday's losses. We suspect the real reason is the triple witching on Friday... Photo via twitter.com   The financial press has a ready answer: “Stocks gain...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com