Monday, January 10, 2011

Speed Bump in the Euro-pocalypse—It’s Portugal!

Overnight, Portugal’s credit default swaps surged, to 549 basis points, after Friday’s sovereign bond action saw Portuguese debt jump almost 19 basis points and hit a 4.401% spread over 10-year German bonds—

—this morning, Reuters is reporting that Germany, France, and other eurozone members are pressuring Portugal to get in line with Ireland and Greece and take a bailout from the European Financial Stability Facility—

—in other words, after last spring’s exciting blockbuster, EuroCrisis: Greek Gobsmack!, and then last December’s mega-hit sequel EuroCrisis II: Dublin Debacle!, it’s now time for . . .

EuroCrisis III: Portuguese Pooch-Screw!

Notice: Portugal isn’t in crisis mode—yet. So it’s looking like the European Central Bank and the European Union are pre-emptively trying to get Portugal to take a bailout.

Reuter is reporting that a Portuguese bailout would be in the neighborhood of €50 to €100 billion, according to unnamed sources—but that’s no secret (and vague enough to be rather insulting: €50 to €100 billion? Ya think?).

Like Ireland, which is roughly the same size, I’m guessing at this point that Portugal will need around €75 to €90 billion—but that’s a guess: I’ll have an update later today with more precise figures for an estimate.

How will this impact the markets?

Well, the bond markets worldwide have already priced in Portugal’s bailout—that’s been in the cards since Ireland took the Long Swan Dive last December. And Belgium is looking more and more likely to follow suit—especially as they’ve gone for over 200 days without a functioning government. (Talk about a failed state! And it’s the home of the capital of the Euro-weenies! Then again, D.C. is a mess too—remember Mayor Marion Barry? Hookers and crack, a stone’s throw from the Capitol!)

But I digress: As I’ve written extensively, all that matters for the eurozone’s survival is Spain: It’s troubles are more immediate than Italy’s—the other big screw-up in the eurozone—and like I say, Spain is big: Half the size of Germany. Simply too big to bailout.

How Spain is sorted out is the issue, as to whether the eurozone survives or not. As I’ve argued extensively, the best solution that would maintain the core stability of a Franco-German monetary (and therefore de facto political) union is for the economically weaker nations on the fringe of the eurozone—the PIIGS plus Belgium—leave the euro and go back to their local currencies.

The nightmare is that Germany leaves the euro, and the whole continent becomes a free-for-all.

We’ll have to see how that movie plays out:

For now, remember: Portugal, and Belgium, are merely speed bumps on the road to the Euro-pocalypse.


  1. A big test for Portugal will come Wednesday when they auction €1.25 billion in five and ten year bonds. After Friday's auction, it appears that the EMU is trying to prevent a panic in the bond markets this week. A bailout will keep rates low and the spread between Portuguese and German yields will narrow thereby kicking the can a little further down the road.

  2. Hey JMA—

    Something to look forward to—but frankly, I wish they’d get this movie over with: Go forth with the Euro-pocalypse once and for all. This endlessly stretching it out is getting on my nerves.



  3. News from the European Sovereign debt front can indeed be expected to be entertaining this year.

    Still, one important point should be kept in mind... especially about comparison between Euro and US Dollar.

    The chance that I will still be able to buy anything with euro here in France ten years from now is slim ("What is this banknote? We use francs here, Monsieur!"), BUT the euro remains nonetheless long term a much better long term store of value than the US dollar, and probably also than the British pound.

    One who has 1,000 euro on a bank account runs a significant risk that at some point in the future he will discover this money has suddenly been morphed to 1,000 new francs, or new marks, new liras or whatever... Yet he is likely in the long run to keep a much greater part of the purchasing power of this money than if he had exchanged it for US dollars. Even if he eventually finds himself with 1,000 new pesetas! (the new drachma may be an exception to the rule however, since Greece is the only EU country whose financial picture is about as discombobulated as America's)

    By contrast with the US Federal Bank and the Bank of England, the ECB DID NOT multiply its balance sheet by a factor 2.5 to 3 in the last two years. Nor is the ECB monetizing 60% of European public deficits, like the Fed is doing for America. If it was doing so, there wouldn't have been any talk of any European sovereign crisis!

    It is not because of virtue, not even because of common sense, but because of political factors: that the EU is a federal superstructure floating upon an ocean of nations rather than a nation the like of US or UK, that Germans have a "long memory" about the consequences of runaway money printing (re: 1923). And the severe limitation in Euro's QE makes it more difficult to hide financial problems under a carpet of politically motivated T-Bonds (or Gilt) purchases... which is overall a very good thing, of course. At least in the long run. For the short run, well :-( ...

    The alternative would be to take public control of the sovereign debt market, suppress market forces, like Bernanke is doing. Then everything remains under the carpet... until the disaster, as you have clearly underlined, GL.

    If I'm still of this world in 2020 and I fly to New-York, I would expect to buy a coffee at the airport, which would cost me 20 dollars... that is 5 francs, or 4 marks.

  4. Europe is not unlike the various states in America, most are insolvent.
    California is the 8th largest economy in the World, about the same size as France. And California is Broke.
    Portugal is #50 on the list of GDP countries. And at $2.5B it seems rather small when compared to California’s $22.2B fiscal hole.
    It is known that 43 of the 50 states in America are in a financial mess. And what about the Federal Government, that’s an even bigger mess.
    Italy is #11 GDP at $1.7T with a population of 60 million
    Ireland #57 GDP at $172B with a population of 6.2 million
    Portugal #50 GDP at $2.5B with a population of 11.3 million
    Greece #35 GDP at $333B with a population of 11.2 million
    Spain #14 GDP at $1.359T with a population of 46 million

    California’s GSP is $1.85T with a population of 37 million

    The Euro is in a mess, but less so than the dollar. Individual Euro PIIGS might resort back to their pre Euro currencies, but what can the USA do?

    European countries are implementing austerity measures, but what is the Fed doing? It continues to print (create more debt).

    Undoubtedly, it is not going to be a walk in the park for European countries in getting back into fiscal fitness, but it will happen, and it will be less painful than it will be for US citizens. This link gives a perfect illustration:

    There is only so much lipstick to go around, which pig would you prefer to paint?


Knock yourself out!

The cult of stability is a culture of death.