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'.
“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 - we want to once again thank all of you who have supported us with donations.
To donate Bitcoins, use this address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Thank you for your support!
Most read in the last 20 days:
- Why Do We Let Other People Tell Us What to Do?
Lame Theories of Government We have been disappointed with political ideas and theories of government. They are nothing but scams, justifications, and puffery. One tries to put something over on the common man… the other claims it was for his own good… and the third pretends that he’d be lost without it. Most are not really “theories” at all… but prescriptions, blueprints for creating the kind of government the “theorist” would like to have. Not surprisingly, it is a...
- Gold and Gold Stocks – Back to Tricky, but Interesting Signals Emerge
A Relentless Short Term Decline When we last discussed the gold sector, we noted that with gold approaching its 200 day moving average, a pullback had to be expected soon. In the meantime, a bit more than just a pullback has happened, as a severe sell-off started after the October FOMC announcement. Photo via genius.com However, as you will see below, this has most likely merely reset the clock a bit in terms of anticipating a medium term trend change (even if...
- Gold and Gold Stocks – It Gets Even More Interesting
Technical Backdrop If only we could get a dime for every bearish article on gold that has been published over the past two weeks...but one can't have everything. When a market is down 83% like the HUI gold mining index is, we are generally more interested in trying to find out when it might turn around, since it is a good bet that it is “oversold”. Of course, it if makes it to 90% down, it will still be a harrowing experience in the short term. We like these catastrophes because...
- The Greatest Racket of All Time
The Successes of the Global War on Terror One would think that the so-called “Global War on Terror”, which has been given fresh impetus by the Paris attacks, must be going swimmingly. What else could explain the great enthusiasm with which it is pursued? It may be recalled that it started in earnest after the WTC attack – also a declaration of war, as it was put at the time. As is often the case when Islamist fundamentalists strike, the actual attackers immolated themselves on...
- The Long, Cold Winter Ahead
Not Immune Cold winds of deflation gust across the autumn economic landscape. Global trade languishes and commodities rust away like abandoned scrap metal with a visible dusting of frost. The economic optimism that embellished markets heading into 2015 have cooled as the year moves through its final stretch. Photo credit: David Byrne If you recall, the popular storyline since late last year has been that the U.S. economy is moderately improving while the...
- How Do People Destroy Their Capital?
There is no Santa Claus I have written previously about the interest rate, which is falling under the planning of the Federal Reserve. The flip side of falling interest rates is the rising price of bonds. Bonds are in an endless, ferocious bull market. Why do I call it ferocious? Perhaps voracious is a better word, as it is gobbling up capital like the Cookie Monster jamming tollhouses into his maw. There are several mechanisms by which this occurs, let’s look at one...
- Junk Bonds Under Pressure
While the Stock Market is Partying ... There are seemingly always “good reasons” why troubles in a sector of the credit markets are supposed to be ignored – or so people are telling us, every single time. Readers may recall how the developing problems in the sub-prime sector of the mortgage credit market were greeted by officials and countless market observers in the beginning in 2007. Photo credit: Getty Images At first it was assumed that the most highly...
- Angry Belgian Muslims and the Price of Welfare Statism
Ill-Tempered Mohammedans in the Socialist Paradise In the wake of recent revelations about the identities of the morons involved in the horrific Paris attacks (happily, most of them shuffled off the mortal coil as well, thereby improving the aggregate degree of moral clarity and intelligence in the world), a friend pointed us to an article at Unz Review that asks: “Why Does Belgium Have Such Angry Muslims?” Our instinctive, immediate reaction was to argue that the bland, boring...
- The Plane Incident in Syria
A Strange Event The topic of the SU-24 Russian plane shot down by Turkey over the weekend in Syria has been discussed all over the media ad nauseam by now, but we want to add a few observations and suggestions of our own. Some have perhaps not received the attention they possibly deserve. Image of Russian jet shortly after it was hit by a Turkish missile. Luckily someone was promptly at hand to make a qualitatively acceptable video of the incident. As is well known, cameramen...
- Can Investors Trust the New Gold Fixing?
Statistical Analysis of the New Gold Fixing Since 20 March 2015 a new gold price fixing organized by the London Bullion Market Association has been in operation. It has replaced the previous price determination process, which was in place for more than a century and became subject to criticism as it was highly vulnerable to manipulation. Has manipulation now ceased? Gold fixing at N.M. Rothchild and Sons offices in London. The first fixing took place there on 12 September...