Thread: Summarizing The Reactions To The Portuguese Bailout

Summarizing The Reactions To The Portuguese Bailout

by Tyler Durden
04/06/2011 15:32 -0400
62 comments

Following weeks and months of lies that Portugal does not need a bailout, that is is not Ireland, Greece, Algeria, Tunisia, Egypt, Middle Earth, Uranus, etc, the country finally realized it is bankrupt, unless it comes, hat in hand, bagging for a bailout from Jean Claude Trichet (who now is scratching his head how to spin this latest sovereign default as bullish ahead of tomorrow's rate hike). Which it just did. Reuters has compiled the reactions by those who felt like sharing their views on this foregone conclusion.

KEY POINTS: * Portugal's situation worsened last month after the government resigned, sending bond yields soaring, sparking a series of rating downgrades and a warning by local banks that they may no longer be able to buy government debt. * "In this difficult situation, which could have been avoided, I understand that it is necessary to resort to the financing mechanisms available within the European framework," said Finance Minister Fernando Teixeira dos Santos.

VASSILI SEREBRIAKOV, SENIOR CURRENCY STRATEGIST, WELLS FARGO, NEW YORK:

"It's somewhat puzzling this lack of euro reaction to Portugal admitting it needs aid. I guess the market is viewing this news as a foregone conclusion. This is a big financial step for Portugal and it's obvious that Portugal cannot finance itself. As to why the euro doesn't care, there are other themes playing out in the market. Investors are obviously focused on the ECB rate hike on Thursday. And in an environment where yield is the market's main focus, investors are bidding up the euro because of the prospect of more interest rate increases."

DAVID LEDUC, CHIEF INVESTMENT OFFICER, STANDISH, A DIVISION OF BNY MELLON ASSET MANAGEMENT, BOSTON:

"In general, we've been concerned about Portugal's fiscal challenges and not only think they need short-term financial help but also a high probability that Portugal has to restructure their debt.

"We remain concerned about it and the political difficulties add a challenge to what they have to do.

"The political stress and economic difficulties highlight the severe challenge Portugal and other countries have in pursuing austerity packages. When you can only control fiscal policy, not monetary policy, then you don't have all the levers available. When you only can cut and can't do other things to make yourself more competitive, such as devaluing your currency, that's a challenge."

DAVID DIETZE, CHIEF INVESTMENT STRATEGIST, POINT VIEW FINANCIAL SERVICES, SUMMIT, NEW JERSEY:

"In some ways it is a positive -- I think Portugal was in denial. On this side of the pond no one understood exactly how Portugal was going to be able to dig out of its problems without getting aid. We have seen Greece and Ireland ultimately have to go hat in hand, and traders every day have been looking at the widening spreads between the German sovereign debt and the Portuguese sovereign debt and wondering how it all ends."

ERIC GREEN, CHIEF ECONOMIST AND HEAD OF RATES STRATEGY, TD SECURITIES, NEW YORK:

http://www.zerohedge.com/article/summar ... se-bailout

How Europe Can Eat Its Cake And Have It Too: Hiking Rates As The EFSF Goes Into Overdrive

by Tyler Durden
04/06/2011 17:16 -0400
20 comments

With Portugal about to enter the warm embrace of the EFSF, even though nobody still knows just what the constantly updated and revised EFSF actually is, and the IMF (read America) is far more likely to end up footing the cost of the latest European bailout, it makes sense to find out just what the status of the latest incarnation of the EFSF is, or as Peter Tchir of TF Market Advisors calls it, the EFSF V1.5. This is especially important as in 14 hours, Jean Claude Trichet will most likely announce a 25 basis point increase in the ECB funds rate, even as more and more of the European periphery is struggling with solvency and liquidity access. That tightening by the Central Bank will either make life for the PIGS even more complicated or make their lock out from traditional capital markets complete. On the other hand the ECB has no choice with inflation in Europe surging, and Trichet forced to do something, anything. Therefore, courtesy of the EFSF, Europe will quite literally have its cake and eat it too: it will have a QE-like debt monetization instrument in the form of a €400 billion monster CDO, while at the same time it will be removing market liquidity: this is supposed to achieve one goal and one goal only - keep cheap liquidity flowing for the insolvent part of Europe and slow down growth in the healthy part, read Germany. This has never been tried before, and nobody is willing to risk their career with a statement that it will work. On the other hand, this set up provides some perspective on how Bernanke may proceed in the future: he may be forced to tighten even as he continues to monetize various pieces of debt. Although by the time such a "solution" is implemented, there will be enough precedent to determine if the latest European experiment has been a complete or just partial failure.

From TF Market Advisors

EFSF V1.5

EFSF was launched with great hype last summer and with the expectation that it solved the European debt problem. As Europe's weakest countries continue to limp along , many of the flaws of the original plan have been exposed.

So, like a giant software developer, the European nations have slapped on some additional bells and whistles, leaving us with EFSF 1.5 and promised that EFSF2 will be even better and this time really will solve the problem!

The big question is, can EFSF2 actually work? I believe there is a chance that it could work, but it needs to be structured correctly and I highly doubt the governments of Europe have the will to do it properly. To figure out what can be done, it's worth reviewing the flaws of EFSF1 that have led us to this limbo.

Last summer, the European nations banded together to create EFSF because they firmly believed that the capital markets were unfairly denying funding to worthy borrowers. The original program was developed as a way to stop the evil capital markets, the vile hedge funds, and the devilish CDS players from vilifying worthy countries doing their best in tough times. Certainly, when the U.S. government stepped in to support the commercial paper market back at the height of the financial crisis, that market was in chaos from a dearth of liquidity rather than any widespread belief that those companies would default in such a short time frame. Investors lacked liquidity and there were better investment opportunities (IG bonds were trading a deep discounts and extremely wide spreads). So the government stepped in and offered support to that market. It resolved itself over time and functions properly again. But that was clearly a liquidity rather than a risk problem. It was never clear to me that the problems of Greece or other periphery countries were related to a lack of liquidity. Over time it has become obvious to me that the problem isn't a lack of liquidity, its real concern over the ability of these countries to repay their obligations. So the original premise of EFSF, that it was a lack of market liquidity, causing the PIGS' problems, has proven false. There is plenty of liquidity.

The real problem is that more and more investors don't believe these countries have the ability to meet their obligations. So, EFSF2, must now rely on the assumption that over time these countries can correct their fiscal problems and repay their obligations. This is a much harder sell for the countries involved - on both sides of the equation. While it was relatively easy to convince people that this was a market problem last year, it's a growing minority of people who believe that. A growing number of people now see the problem as long term structural, which is much harder to solve than a temporary liquidity problem.

EFSF2 must be based on the premise that these countries are being denied funding because investors don't believe in their ability to pay. Its not a question of liquidity it's a question of solvency.

EFSF was not prefunded. Each time a country wanted to access it, they would have to apply and other countries would then have to support bonds issued by EFSF to support that loan. This created a slippery slope (see link below for more details) where countries who had been guarantors of previous loans would now be asking for loans. It also ignored the fact that the countries were correlated, so that if one country was asking for money, it would be likely that other countries would also need money (Ireland and Portugal), and that at the same time, some of the countries who would be providing the guarantees, would also be in worse shape (Spain, Italy). By relying on funding or guarantees at time of need, rather than up front, it did not resolve the domino effect. It also has left the funding more exposed to political uncertainty as the reaction time is weeks or months, which is just too long and constantly tests the political will of the countries providing the support.

EFSF2 must be prefunded and not rely on capital calls. The market must know that the money is already there and is available for use, otherwise the availability will continue to be questioned.

Why was EFSF so complicated? It relied on structure rather than money from the participating sovereigns. The guarantees were 120% of the loans. There were holdbacks equal to the NPV of the spread. Certainly part of this was so that the group could join up to issue bonds to the market with a 'coveted' AAA rating, while making loans deemed extremely safe (possibly senior) to the countries that needed to borrow. Maybe there is something valid about how it was structured, but to me, it always felt as though the countries claimed they were willing to support the weak countries, they really weren't. Why guarantees and not cash? These countries could easily go and borrow money and then fund the loans directly. So why use guarantees? I'm assuming that the guarantees don't show up as obligations of the country, or can at least be obfuscated away (ala Fannie and Freddie) so that people don't treat it as real debt. Why hold back the NPV of the spread? EFSF would lend money but effectively defease the spread payments.

I'm not sure why, either the country is creditworthy or it isn't. Making a PIK loan to the country would have seemed weak, so they got around it by making a proper loan but holding back the future interest payments. The EFSF pretended to be willing to lend, but really wasn't prepared to take any risk. That leads to the next question, why use privately negotiated loans to lend to the countries? Do you really need to do that to get the country to agree to austerity measures? Again, the answer is clear, you can make it seem like you are lending to that country and taking risk, but structure away so much of the risk that your loan is very safe and structurally senior to any other debt of that country. It's like a magician's dream, everyone watching the left hand and not noticing what the right hand is doing. The left hand is saying we are providing big support to the weak members, meanwhile the right hand is taking 20% haircuts on the guarantees, using guarantees rather than cash, defeasing future interest payments, and then privately negotiating each loan to create a structurally senior piece of paper in event of the country failing to meet its ongoing austerity commitments. Maybe since the original premise was that this was a liquidity problem, this makes sense, but it's hard to see that the lending countries ever had any real risk appetite.

EFSF2 must be prepared to lose money. It cannot just pretend to be a lender, it must take risk pari passu with the market.

So I believe that EFSF2 can work, but it must be prefunded, have the ability to intervene or trade in the market, and accept the real risk of loss on a pari passu basis with other lenders. A 400 billion war chest, managed by smart investors could work, though finding a 'smart' investor willing to lend to these countries might be a difficult challenge. The reality is, in my opinion, that the countries wanted to provide the appearance of support without actually taking much risk. There were probably lots of 'wink-wink' conversations in the back rooms explaining that although EFSF looks big, its structured in such a way to be ultra safe and not really take much risk.

That's how it was sold in the countries to get the necessary votes. I don't think a real risk taking solution is acceptable to the countries that would be taking the risk. At the same time, more of the same will not be acceptable to the market as they won't want to take the risk of being structurally subordinated to EFSF, and the countries receiving the money are less and less inclined to bear the massive austerity programs in face of other countries continuing to spend their way out theirs (U.S. and Japan as prime examples). We can probably kick the can down the road and hope and pray that time fixes the economies in the weak countries, but without a new, much more aggressive EFSF2 program, we will likely be listening to a whole new cast of politicians discussing EFSF3 and why that will work.

Alternatively, if EFSF2 could be made to act like QE2 that too could work.

The QE programs, for better or worse, have the advantage of simplicity.

Print money (or electronically create fractional reserves) and buy your own debt. It's simple and easy and works. It's hard to see EFSF morphing into anything like that. I'm not sure the framework of the European Union would allow it. While the Fed sees no risk in debt issued by the Treasury, I'm not sure that the ECB believes there is no risk in debt issued by Portugal.

It doesn't seem like a feasible solution and who knows what it would do to inflation, but I wouldn't be surprised if we hear some rumblings of a potential European QE solution, especially as it becomes clear there is no real support for a EFSF2 that is materially different than EFSF1.

In the meantime enjoy the rally in European sovereign debt with Ireland 10 year bonds now 100bps tighter in a week.

Prior article on the slippery slope nature of EFSF http://tfmarketadvisors.blogspot.com/se ... 01T00%3A00%3 A00-05%3A00&updated-max=2011-01-01T00%3A00%3A00-05%3A00&max-results=5

http://www.zerohedge.com/article/how-eu ... -overdrive

"We Don't Need A Bailout... We Don't Need A Bailout...Uh, We Need A Bailout": Portugal Admits To Needing EU Rescue

Submitted by Tyler Durden
04/06/2011 13:31 -0400
113 comments

Update: It's Official. Portugal is Bankrupt: Portuguese finance minister says the country will have to use European Union mechanisms to resolve its debt problems, to make announcement at 8PM.

In the biggest shocker to come out just hours before the ECB's announcement tomorrow, which many see is a guaranteed rate hike, Journal de Negocios has just announced that according to the Portuguese Finance Minister, the country needs a bailout, after weeks and weeks of Greece-style denials. And yes, nobody could have foreseen this, and all that jazz.

From Negocios: http://www.jornaldenegocios.pt/home.php ... &id=478019

The Minister of Finance considers that Portugal has already asked for help. In a written response to questions raised by the Business, Fernando Teixeira dos Santos said that "it is necessary to refer to available funding mechanisms in the European framework".

and more:

Fernando Teixeira dos Santos believes that Portugal needs to ask for help, a set of questions in writing.

Business: Portugal must now ask for help as they appeal the bankers and economists in general? The debt that you have to pay in a year do not worry you?

Fernando Teixeira dos Santos: "The country has irresponsibly pushed a very difficult situation in financial markets. Given this difficult situation, which could have been avoided, I think it is necessary to refer to available funding mechanisms in the European context as appropriate to the current political situation. This will require also the involvement and commitment of major forces and political institutions."

Greece...Ireland... Portugal... Hello Spain.

In the meantime, the Greece short end is trading inside Portugal.



Oh, and we can't wait for the rate hike tomorrow.

http://www.zerohedge.com/article/we-don ... g-eu-rescu

UK Stagflation Pervasive: Industrial Production Plummets By Most Since August 2009

Submitted by Tyler Durden
04/06/2011 07:52 -0400
62 comments

Stagflation: meet economic collapse. The UK basket case is getting very, very ugly, with today's obliteration of Industrial Production putting in doubt expectations of a BOE hike. From AP: "British industrial production fell 1.2 percent in February from January, an official report said Wednesday, marking the largest monthly fall since August 2009 and far worse than analyst expectations for an increase of 0.2 percent. The Office for National Statistics said a 7.8 percent drop in oil and gas extraction was the main reason for the fall, while the manufacturing sector was flat." And the winner: "It may be that the industrial recovery is past its peak," said Samuel Tombs, U.K. economist at Capital Economics. Industrial production accounts for 17 percent of British GDP." That's the bad news; the good news is that with runaway inflation which is now surging at 5%+ the economy has got to be improving: after all where would all this demand be coming from if not from some massive latent recovery. Oh wait, what's that you say: endless liquidity? You don't say. Well, never mind then. In other news GBP crosses get obliterated as rate hike expectations are put on hold. In fact what you can put on the front burner is more money printing, both at the BOE and the Fed because central banks are so much more adept at "controlling" inflation than deflation.



Not even Goldman could spin this data. From Goldman Sachs:

BOTTOM LINE: Headline industrial production was much weaker than expected in February (-1.2%mom versus Cons: +0.4%), driven by sharp falls in oil and gas extraction (-7.8%mom) and utilities output (-2.1%mom). This lowers our 'bean count' for the ONS's Q1 GDP data from +0.8-0.9%qoq to +0.6-0.7%qoq, but the uncertainty surrounding the preliminary Q1 GDP data remains substantial. Manufacturing output (which excludes utilities and energy supply) was unchanged on the month. This was also weaker than expected (Cons, GS: +0.6%mom), but the downside surprise was smaller than to overall IP.

1. Both headline IP and its manufacturing output component surprised on the downside. The larger surprise in the former was driven by a sharp decline in utilities output (-2.1%mom) and oil and gas extraction (-7.8%mom) - both of which are not part of manufacturing output. Taken together, the components of this morning's release push our Q1 GDP 'bean count' down from +0.8-0.9%qoq to +0.6-0.7%qoq (Table 1). Construction output for February is released on Friday and this will be the final input into the Q1 GDP data available before 27 April. We will further refine our estimate of the Prelim GDP in light of Friday's data but, even after this, the uncertainty around the Q1 print will remain substantial.

2. The GDP implications of the particularly weak non-manufacturing components of headline IP must be seen in the context of the lower weight the MPC places on them. In assessing the underlying path of output, policymakers tend to strip out both utilities output (because it is volatile and largely driven by the weather) and oil and gas extraction (again because it is volatile, but also because it is not very labour intensive, predominantly offshore and internationally-owned). According to the ONS, mining and quarrying experienced a seasonally unusual slowdown due to maintenance work, and utilities output contracted partly due to mild weather in February. That's not to say that zero sequential growth in manufacturing output through February is not disappointing (consumer durables output was the largest drag, registering -2.9%mom), but the downside surprise in this component is smaller than the disappointment in headline IP.

3. One would need manufacturing output growth of around ½%mom in March to surpass the Q4 growth rate of +1.1%qoq registered in Q1. As Chart 1 shows, the latest Manufacturing PMI readings remain consistent with very strong growth - around 10% annualised (more than 2%qoq non-annld).

4. A number of clients have asked us what reading of the ONS's Preliminary Q1 GDP we think would be sufficient for the MPC to hike in May? We don't think there is a precise answer to this question - much as the MPC has appeared to emphasize the importance of this release, other factors (the strength of survey data and pay deals, to name just two) are clearly influential also. That said, it seems likely that growth of +0.8%qoq would be sufficiently strong (as this is what they forecast in the February Inflation Report), while +0.5%qoq or below (implying zero growth over Q4 and Q1 together) is likely to be too weak. Our central forecast remains that the first hike will take place in May, but we will revisit this question in light of the Q1 GDP release on 27 April.

5. Also released today, the headline employment index in the Report on Jobs gave back some of its sharp February increase, falling three points from 62.7 to 59.7 in March. As a reliable leading indicator of private-sector jobs growth in the past, the Report on Jobs is consistent with private-sector employment growth of close to 2% annld.in Q1 (Chart 2). That would be more than enough to cover prospective public-sector jobs losses (0.3% of private-sector employment per year) and trend workforce growth (0.7%-0.8%).

http://www.zerohedge.com/article/uk-sta ... ugust-2009

Portugal Is Outtahere: Country Sells 6 Month Bills At Ridiculous 5.117%, 12 Month At 5.902%, Social Security Fund Stuck With Bill

Submitted by Tyler Durden
04/06/2011 07:12 -0400
67 comments

Earlier today Portugal, by the skin of its teeth, sold €1 billion in 6 and 12 month Bills, which however may be its last auction before the country is forced to beg for a bailout: the yield on the 6 Month bill rose from 2.984% three weeks ago to 5.117%, while the 12 Month surged from 4.311% to 5.902%. This is simply a ridiculous yield and at this rate pretty soon the country will be paying more to issue Bills than Bonds. "I suspect that as far as the market is concerned, funding at these levels can only be viewed as a temporary measure," said Peter Chatwell, rate strategist at Credit Agricole. "There has been a very important signal from the banks for the future," said BNP Paribas analyst Ioannis Sokos. "Portugal can still make it through April, but probably won't get to June without a bailout." Which incidentally is when the country is going to have new government elections: cruising through a period of insolvency without a man in charge is probably not the best idea. But what is worst is that the country's social security fund is once again rumored to have been a buyer of last resort. Since these bonds will eventually default, Portugal's pensioners will not be happy to find out that a notable portion of their retirement capital will soon be wiped out.

From Reuters: http://www.forexyard.com/en/news/Portug ... Z-UPDATE-2

Two business newspapers said the public social security fund has been selling overseas financial asets in the last few days to help finance the state by buying sovereign debt at auctions.

Jornal de Negocios and Diario Economico said the Social Security Financial Stabilisation Fund planned to buy T-bills in Wednesday's auction. No one was available for comment at the fund.

The Portuguese banks suggested the government should seek a bridging loan, but neither the EU nor the IMF is likely to offer such temporary finance without negotiated formal conditionality.

Analysts say the high yields, which have already topped 10 percent for five-year bonds, are unsustainable. The fall in the value of the bonds also undermines its banks, who have been substantial buyers of government debt.

"The rating actions follow the downgrade of Portugal's debt ratings and also reflect the weakened standalone credit profile of most Portuguese banks," Moody's said in a statement.

The banks concerned included Caixa Economica Montepio Geral, Caixa Geral de Depositos, Banco Comercial Portugues, Banco Espirito Santo, Banco BPI, Banco Santander Totta and Banco Portugues de Negocios.

Portugal has to repay over 4.2 billion euros in maturing bonds on April 15, and then another 4.9 billion euros in June. Including coupon payments and deficit financing, its requirements until June are put at 12 to 15 billion euros.

"From the pure cash perspective, April should be OK, even with coupons and deficit financing, but then if the domestic bid disappears, there's not much room for manoeuvre," Commerzbank's Schnautz said, referring to the local banks' threats.

He expected the six-month T-bills to yield between 5.5 and 6 percent -- about double the 2.98 percent average yield in the previous auction on March 2 -- while the borrowing cost for the 12-month paper should rise above 6 percent compared to 4.33 percent in mid-March.

At this point we are merely seeing a repeat of what happened in Greece last year. And the longer it takes Portugal to admit defeat the greater the cost for everyone involved. But all shall be well: after all there is a big, fat CDO at the bottom of it all to bail everyone out. And let's not forget that the ECB is about to hike rates and set off a chain of events that will end the Eurozone.

Surely this will end so very well.

http://www.zerohedge.com/article/portug ... month-5902