Tag Archives: portugal

In case you thought the sovereign debt crisis was over: “Portugal yields soar, underline euro worries”

The sovereign debt crisis is back! Actually, it never went away…

Portugal yields soar, underline euro worries
ECB comes off THE sidelines to buy Portuguese bonds

Proving that the euro zone’s sovereign-debt crisis is yet to be vanquished, yields on Portuguese government bonds continued to climb to levels viewed as unsustainable on Thursday, prompting the European Central Bank to intervene.

Yields on the 10-year bonds soared to a euro-era high of more than 7.6% at one point Thursday morning, according to strategists. The European Central Bank later intervened to buy Portuguese bonds, several analysts said, after staying out of the markets amid relative calm in recent weeks.

Read the rest of the article here…

Portugal ready for its bailout?

In a follow-up to yesterday’s “Ready for round three of the sovereign debt crisis?Marketwatch is covering the Portugal story. Here’s the lead:

Portugal remained in the spotlight Monday as Lisbon fought intensifying speculation that it would be forced to become the third euro-zone nation to seek a fiscal bailout due to rising borrowing costs.

News reports over the weekend and on Monday said the Portuguese government was under pressure from European Union partners to tap the rescue fund established by the EU and the International Monetary Fund in hopes such a move would quell the ongoing turmoil in European sovereign-debt markets.

Portugal has continued to insist that it won’t need aid but a key test looms on Wednesday when the government attempts to sell between 750 million and 1.25 billion euros ($936 million and $1.6 billion) of three- and nine-year bonds.

Now the part I find most relevant:

The yield on 10-year Portuguese government bonds pressed above the 7% threshold on Friday to trade around 7.14% and likely would have jumped even higher had the European Central Bank not been an apparent buyer of Portuguese bonds, analysts said.

It took Greece 16 days and Ireland 20 days to request EU/IMF aid after their 10-year yields breached the 7% level, said Gary Jenkins, head of fixed income at Evolution Securities. He noted that Portugal has been through the 7% barrier previously and then saw yields retract somewhat.

The cost of insuring Portuguese government debt against default via credit default swaps continued to rise Monday, with the spread of five-year swaps widening by 12 basis points to a record 555 basis points, according to data provider Markit.

A bailout of Portugal could be imminent. But Portugal is a small country and not likely to have any major impact. However, this will only further push Spain and Italy toward bailouts.

And let’s not forget Belgium either:

King Albert II of Belgium on Monday called on the country’s caretaker government to write a new budget in an effort to calm worries the nation will be unable to meet its budget goals, The Wall Street Journal reported. The nation has been left without a formal government since a June election due to disagreements between politicians from the Dutch-speaking north and the French-speaking south. The yield premium demanded by investors to hold 10-year Belgian debt widened by 12 basis points to around 138 basis points, or 1.38 percentage points, the report said, near record levels seen in November. The king asked current Prime Minister Yves Leterme to draft a 2011 budget with a deficit below the 4.1% of gross domestic product agreed with the European Commission last year, the report said.

Europe is a total mess, not that the US is much better. So far, everything that has been done has been stop-gap. Countries with 12 percent deficits propose reducing them to 5 percent. Countries with debt of more than 100 percent of GDP have no plan to reduce them. These countries are only proposing to reduce the rate of decline, but not stop it nor turn things around. Until I see countries with plans to reduce the size of government and balance their budgets, I will continue to worry and write about the sovereign debt crisis and the economic doom it will cause if not addressed.

Ready for round three of the sovereign debt crisis?

First came Greece. Next was Ireland. Next up may be Portugal.

Portugal under pressure to seek EU/IMF aid

Pressure is growing on Portugal from Germany, France and other euro zone countries to seek financial help from the EU and IMF to stop the bloc’s debt crisis from spreading, a senior euro zone source said on Sunday.

Some preliminary discussions on the possibility of Portugal asking for help if its financing costs on markets become too high have taken place since July, the source said.

No formal talks on aid have started yet, a number of euro zone sources said, but the pressure was rising in the Eurogroup, which brings together euro zone finance ministers.

“France and Germany have indicated in the context of the Eurogroup that Portugal should apply for help sooner rather than later,” the senior source said, adding Finland and the Netherlands had expressed similar views.

The article continues that Portugal and Germany are denying all the above, but then points out that this was the case before Ireland got its bailout. The article then returns to reality.

The growing pressure on Lisbon follows a sharp rise in Portuguese 10-year bond yields at the end of last week to euro lifetime highs above 7 percent, as investors worried about the prospect of up to 1.25 billion euros of bond supply it will offer at an auction on Wednesday.

The yield of five-year Portuguese bonds on the secondary market is 6.43 percent and 10-year paper trades at 7.26 percent. Economists say a key question for Portugal is how long it can sustain the high yield levels, and the auction will be an important gauge of that.

Portugal and the EU can fight reality for only so long. In all likelihood, the bond market will force Portugal to get help. And then it will force Spain and Italy to do so. Belgium may also need help if they can’t form a government. With the at-risk economies slowing due to austerity and countries like Germany and France giving free money to them, even those countries will be in economic trouble.

How long will Germany and France give away their money to others instead of saving it for themselves? How much longer will the Euro last?

Two more downgrades. Sovereign debt crisis continues.

First:

Hungary faces the risk of further downgrades of its credit rating after Fitch Thursday cut Hungary’s sovereign debt by one notch to BBB-.

The risk of a further downgrade of Hungary’s credit rating could increase in case of further intensification of the euro area crisis, said Citigroup economist Piotr Kalisz. Citi doesn’t expect a downgrade to non-investment grade in the near term, but markets could start pricing in such a risk especially if the government fails to present a credible fiscal adjustment plan.

Although the downgrade came as no surprise, the forint reacted by weakening to the euro. Fitch followed Moody’s Investors Service Inc. and Standard & Poor’s Corp. in putting Hungary’s rating to one grade above junk.

Second:

Fitch Ratings on Thursday downgraded Portugal’s credit rating to A+ from AA-. The agency also downgraded Portugal’s short-term currency rating to F1 from F1+. The Associated Press said that Fitch cited a slow reduction in Portugal’s deficit and a tougher financing environment as reasons for the downgrade. The euro bought $1.3098, an improvement from earlier in the U.S. session, and slightly up from late Wednesday.

Anybody think the sovereign debt crisis is over?

Europe burns! CDS imply 7 to 11 notch credit downgrades. Belgium and France to join the sovereign debt crisis?

First Greece. Then Ireland. Next may be Portugal and Spain. Some are talking about Italy as well. As the sovereign debt crisis spreads through Europe, it is working its way up the food chain. Now, some are talking about Belgium and France too:

France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut.

Moody’s Investors Service said Dec. 15 it may lower Spain’s rating, citing “substantial funding requirements,” and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Costs to insure French government debt rose to a record today with the country’s credit default swaps more expensive than lower-rated securities from the Czech Republic and Chile.

Costs to insure French government debt trebled this year, reaching an all-time high of 105.5 today, according to data provider CMA. Credit default swaps tied to Czech securities were little changed at 90 basis points and Chilean swaps ended last week at 89.

The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s, according to the New York-based firm’s capital markets research group.

Contracts on Portugal imply a B2 rating, 10 levels below its A1 grade, while swaps tied to Spanish bonds trade at Ba3, 11 steps below its Aa1 ranking, data from the Moody’s research group show. Derivatives protecting Belgian debt imply a rating of Ba1, nine steps below its current rating of Aa1.

This is eerily familiar. The credit rating agencies gave overly optimistic ratings to collateralized mortgage obligations (portfolios of mortgages) and were then slow to downgrade them. Now, they are making the same mistake on an international level.

What do you think would happen if the credit rating agencies recognized reality and downgraded these countries to where the market believes they should be? The markets would crash. That’s why they are avoiding the painful truth.

However, the credit rating agencies and governments can only deny reality for so long. Eventually, they will have to recognize the truth. The market will force the credit rating agencies to downgrade sovereign debt whether they want to or not. The market will force countries to restructure their welfare state systems or force them into bankruptcy.

I pray that this is done sooner rather than later. It will be painful. Extremely painful. There will be riots in the street as we are already seeing. But it is better to bear the cost now when the situation is still manageable, just barely so, than when all chances of saving western civilization are gone and nations descend into anarchy and tyranny.

Sovereign debt crisis worsening. Governments paralyzed. Solution too hard to swallow.

Despite all the governments’ efforts, or maybe because of them, the sovereign debt crisis is only getting worse. Marketwatch reports:

The euro zone’s sovereign-debt crisis intensified Tuesday, with yields on Spanish, Italian and other peripheral government bonds soaring in the wake of a weekend meeting of European Union finance ministers that failed to soothe fears of the potential for future defaults.

The yield on 10-year Spanish government bonds jumped to around 5.63%, strategists said, a day after surging to 5.43%.

The move sent the yield premium demanded by investors to hold 10-year Spanish debt over comparable German bunds to more than three full percentage points.

“Ireland’s bailout did nothing to ease the euro-zone debt crisis: it might have even made it worse,” said Steven Barrow, currency and fixed-income strategist at Standard Bank. “For now the market sees a pattern emerging and the next piece of the bailout puzzle seems to be Portugal, with Spain to follow after that.”

The yield on 10-year Italian bonds also rose for a second day to hit 4.77% from around 4.64% on Monday. Portuguese, Greek and Irish bond yields also rose. And outside the periphery, the Belgian 10-year bond yield continued to climb, hitting 3.97% versus around 3.86% on Monday.

How long before Europe realizes that bailing out the banks, announcing plans to cut their deficits to 3 percent in four years time, and getting bailouts from EU and IMF will not work? The sovereign debt crisis will continue until these European countries announce balanced budgets effective immediately (2011) or, at the worst case, next year (2012) and that they will never again bail out the banks. They also have to leave the Euro, which is partly responsible for the mess to start with.

Unfortunately, I doubt the European governments will implement these measures. And if they were to do so, the people would be in full revolution. The only easy way out I see is if the economy suddenly stages a huge recovery. Barring that, it looks like things will be getting worse, possibly much worse.

Ireland officially gets its bailout, market gods are displeased.

Ireland finally got its bailout on Sunday and the market is less than impressed. In fact, one could say it is outright disappointed. Marketwatch reports:

The cost of insuring Spanish and Portuguese government debt rose Monday as spreads on peripheral euro-zone sovereign credit default swaps, or CDS, widened to record levels in the wake of a lackluster Italian bond auction, analysts said. The five-year Spanish CDS spread widened by 25 basis points to 350 basis points, according to data provider Markit. That means it would now cost $350,000 a year to insure $10 million of Spanish debt against default, up from $325,000 on Friday. The Portuguese spread widened to 545 basis points from 502, Markit said, while the Italian spread widened to 231 basis points from 215. “Spain and Portugal are now at record wides, suggesting that contagion fears haven’t been assuaged by Ireland’s bailout,” said Gavan Nolan, vice president for credit research at Markit.

When Greece got its bailout, spreads narrowed and the market was happy. But then credit in Europe headed down and spreads hit new highs. Traders are acting smarter this time. If the bailout didn’t work for Greece, they are not going to assume that it will work for Ireland… or Portugal… or Spain.

And the sovereign debt crisis continues.