Tag Archives: European Commission

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.

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Doctor Evil’s solution to the sovereign debt crisis

There are three stories out this morning regarding the sovereign debt crisis in Europe.

First off is Ireland:

Ireland is likely to end up tapping a loan worth “tens of billions” of euros as a result of talks between the government and officials from the European Commission, European Central Bank and the International Monetary Fund, the head of Ireland’s central bank said Thursday.

The talks aren’t about a bailout, but will lead to a loan to Ireland that the government would have to accept, Central Bank of Ireland Governor Patrick Honohan said in an interview, according to Irish state broadcaster RTE.

The yield on the 10-year Irish government bond fell to around 8% this morning from 8.3% Wednesday, strategists said. European equity markets rallied, with the Irish ISEQ stock index gaining 1.4%.

I don’t see how this changes anything. It may stave off immediate default, but Ireland is simply borrowing more money, exactly what got it into this mess in the first place. This simply buys them time to get their house in order, but will they?

Now, over to Spain:

Spain sold 3.654 billion euros ($4.943 billion) in 10- and 30-year bonds, but was forced to pay higher yields than two months ago as worries about fiscal problems on the periphery of the euro zone push up borrowing costs. The Spanish Treasury offered 3 billion to 4 billion euros of 10- and 30-year bonds. The government paid an average yield of 4.615% on the 10-year bond, up from 4.144% at a September auction, Dow Jones Newswires reported. The 30-year bond auction produced an average yield of 5.488% versus 5.077% in September. The 10-year auction produced a bid-to-cover ratio of 1.84, versus 2.32 in September, the report said.

The market is relieved that Spain was able to sell its bonds. Again, great news that Spain was not forced to default, but it doesn’t change Spain’s fiscal situation. In fact, one can argue that by lending to Spain is simply enabling one is enabling their addiction.

And over to Greece:

The Greek government on Thursday submitted to parliament a budget plan that it said would allow to stick to its target of reducing its deficit to 7.4% of gross domestic product in 2011 despite a sharp upward revision to its 2009 and 2010 deficit levels. The European Union statistics agency Eurostat earlier this week upwardly revised Greece’s 2009 deficit by nearly two full percentage points to 15.4% of GDP. The government raised its estimate of the 2010 deficit to 9.4% of GDP. The finance ministry said it would further cut spending and boost revenues to meet the 2011 deficit target, taking measures that include a rise in the lower value-added tax rate to 13% from 11%, a levy on highly-profitable firms, cuts in government operating expenditures and a nominal pension freeze.

Greece was forced to take more austerity measures because the economy did worse than expected. I am not surprised by this because the austerity itself hurts the economy, like a medicine that tastes bad but is required to kill an infection. I expect more such bad news over the following years. Government forecasts of narrowing deficits in Europe’s at-risk countries and here too in the United State rely on solid economic growth over the next three to four years. Yet, this optimistic economic outlook will only reduce their deficits, or so they hope, to about 3 percent of GDP. Why aren’t they trying to eliminate their deficits entirely? Why are they relying on optimistic economic growth rates? Has government never heard of “expect the worst, hope for the best?” Instead, they hope for the best and trap themselves in a corner if that does not occur.

All this reminds me of a scene from Austin Powers. Doctor Evil finally captures his nemesis Austin Powers:

Dr. Evil: Scott, I want you to meet daddy’s nemesis, Austin Powers.

Scott Evil: What? Are you feeding him? Why don’t you just kill him?

Dr. Evil: I have an even better idea. I’m going to place him in an easily escapable situation involving an overly elaborate and exotic death.

Later in the scene:

Dr. Evil: Come, let’s return to dinner. Close the tank.

Scott Evil: Aren’t you going to watch them? They’ll get away!

Dr.Evil: No, we’ll leave them alone and not actually witness them dying, and we’ll just assume it all went to plan.

Scott Evil: I have a gun in my room. Give me five seconds, I’ll come back and blow their brains out.

Dr.Evil: No Scott. You just don’t get it, do you?

These bailouts, loans, and austerity measures in Greece, Spain, Portugal, and Ireland are “an easily escapable situation involving an overly elaborate and exotic death.” Instead of eliminating the deficit immediately, they have convoluted plans to reduce it over a five-year period. Will these plans work? Nobody knows. But that’s okay because “we’ll just assume it all went to plan.”

Our governmental leaders may not be evil like Dr. Evil, but they certainly are as naive in assuming their plans will work. And they think we are too naive to notice their plans’ inadequacies.