Bloomberg reports:Portugal Rating Cut on Possible Greek Follow and Portuguese Bonds, Euro Slide Downgrade
Moody’s Investors Service cut Portugal’s credit rating to below investment grade on concern the southern European country will need to follow Greece in seeking a second international bailout.
The long-term government bond ratings were lowered to Ba2, or junk, from Baa1, and the outlook is negative. Discussions to involve private investors in a new rescue plan for Greece make it more likely that the European Union will require the same pre-conditions in the case of Portugal, Moody’s said in a statement.
“That’s very significant because not only does it affect current investors, but it is likely to discourage new private- sector lending going forward, and therefore reduce the likelihood that a country like Portugal will be able to regain access to the capital markets at a sustainable cost,” Anthony Thomas, a senior analyst at Moody’s in London, said in a telephone interview yesterday.
Portugal is the second euro country rated non-investment grade by Moody’s, joining Greece, after winning a 78 billion- euro ($113 billion) international bailout in May.
European finance ministers last week authorized an 8.7 billion-euro loan payout to Greece by mid-July, basing a second three-year bailout package on talks to corral banks into maintaining their Greek debt holdings.
The euro fell 0.8 percent to $1.4429 at 5 p.m. yesterday in New York, from $1.4539 the day before, when it touched $1.4578, the highest level since June 9.
Portugal’s government debt agency is scheduled to hold a debt auction today to sell as much as 1 billion euros of bills maturing in October.
Here is an annotated summmary of BoomBustBlog Archives (in reverse chronological order) regarding the Portugal situation over the past year. I invite, if not challenge those who question the utility of the higher end of the blogoshpere to compare BoomBustBlog opinion and analysis (as biting, cynical and hard hitting as it may be) to that of the mainstream media and the sell side analyst community of Wall Street to determine if independent, proprietarry research in the form of a blog is something that this country and the global investment community is in need of... or not!
Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!
There has been a lot of noise in both the alternative and the mainstream financial press regarding potential risk to the ECB regarding its exposure at roughly 48 to 72 cents on the dollar to sovereign debt purchases through leverage, and at par at that. This concern is quite well founded, if not just over a year or so too late. In January, I penned The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults. The title is self explanatory, but expound I shall. Before we get to the big boy media's "year too late" take, let's do a deep dive into how thoroughly we at BoomBustBlog foretold and warned of the insolvency of both European private banks and central banks, including the big Kahuna itself, the ECB! The kicker is that this risk was quite apparent well over a year ago. On April 27th, 2010 I penned the piece "How Greece Killed Its Own Banks!". It went a little something like this...
For Those Who Failed To Heed My Warnings On Portugal, Visualize The Contagion That Causes European Bank Failure!!!
Impact of bank’s banking books on haircuts
EU banking book sovereign exposures are about five times larger than trading book. The table below gives sovereign exposure of major European countries for both trading and banking book. The EU trading book has €335bn of exposure while banking book has €1.7t exposure towards sovereign defaults. EU stress test estimated total write-down’s of €26bn as it only considered banks trading portfolio. This equated to implied haircut of 7.9% on trading portfolio with losses equating to 2.4% of Tier 1 capital. However, if the same haircuts (7.9% weighted average haircut) are applied to banking book then the loss would amount to €153bn equating to 13.8% of Tier 1 capital.
The Pressure On Portugal Increases As Ratings Agencies Finally Arrive To The Fire Before The House Burns Down
Events are unfolding precisely as paying subscribers should anticipate. A quick recap:
- Portugal Is On The Verge Of Tapping Out, UFC Style – You Knew It Was Coming, Here’s The Analysis! Thursday, March 31st, 2011
- ECB Swallows Massive Portuguese Bond Losses As It Is Clear That The Third State Will Soon Join The Bailout Brigade – Haircuts, Here We Come!!! Friday, February 18th, 2011
- The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess Tuesday, February 15th, 2011
Portugal's biggest banks will stop buying government bonds and are urging the caretaker administration to seek a short-term loan to secure financing until a June 5 election, business daily Jornal de Negocios reported on Tuesday.
Of course, its very expensive throw capital down the toilet when your crapper is full AND you run out of capital!
The heads of Banco Espirito Santo, Millennium bcp and Banco BPI met with the governor of the Bank of Portugal on Monday to pass on their views, Jornal said.
"Game Over"
Jornal de Negocios ran a separate column on Tuesday titled "Game over, we have lost, Mr Engineer," referring to Prime Minister Jose Socrates who has insisted the country needs no outside help. Socrates vowed on Monday to keep resisting a foreign financial rescue for the debt-laden country, including the short-term loan suggested by the opposition.
Yeah! Okay...
Asked if a loan from the IMF was possible if the country faced immediate financing problems, Socrates told RTP television: "I don't know of any IMF financing line that would not enforce a programme with conditions. "All programmes that have been negotiated so far were very severe in terms of measures demanded from a country," he said.
What was originally borne from Europe may yet return. Am I the only one bold enough to hint at indentured servitude???
Comparison to slavery
Like slaves, [indentured] servants could not marry without the permission of their owner, were subject to physical punishment (like many young ordinary servants), and saw their obligation to labor enforced by the courts. To ensure uninterrupted work by the female servants, the law lengthened the term of their indenture if they became pregnant. But unlike slaves, servants could look forward to a release from bondage. If they survived their period of labor, servants would receive a payment known as "freedom dues" and become free members of society.[19] One could buy and sell indentured servants' contracts, and the right to their labor would change hands, but not the person as a piece of property.
On the other hand, this ideal was not always a reality for indentured servants. Both male and female laborers could be subject to violence, occasionally even resulting in death. Richard Hofstadter notes that as slaves arrived in greater numbers after 1700, white laborers became a "privileged stratum, assigned to lighter work and more skilled tasks."[20]See also: Black Codes in the USA
Have the Portuguese been Hoodwinked! Bamboozled! Run Amok? Led Astray?
Portugal Is On The Verge Of Tapping Out, UFC Style - You Knew It Was Coming, Here's The Analysis!
ECB Swallows Massive Portuguese Bond Losses As It Is Clear That The Third State Will Soon Join The Bailout Brigade - Haircuts, Here We Come!!!
Here is a sequence of events that I warned thoroughly about, and is unfolding like clockwork. Witness the massive destruction of capital, despite the fact that it could have been so easily seen at least a year in advance. Let's walk through just the past couple of months. In January, I posted "The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults". To wit...
About a month ago, I pulled the covers off of the speculation over whether Portugal would default or not. Most of the “experts” declared that a default was not in the cards. I strongly recommended that the so -called “experts” pull out a calculator and run the math. Not only will there be defaults, but the haircuts will look particularly nasty. See The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History (December 6th & 7th, 2010).
The Truth Behind Portugal's Inevitable Default - Arithmetic Evidence Available Only Through BoomBustBlog
You don't need a "wikileaks.org" site to reveal much of the BS that is going on in the world today. A lot of revelation can be made simply by having motivated, knowledgeable experts scour through publicly available records. I'm about to make said point by showing that the proclamations of the ECB, IMF, the Portuguese government and all of those other governments that claim that Portugal will not default on their loans is simply total, unmitigated, uncut bullshit nonsense.
If you recall, I made a similar claim regarding the Irish government and posted proof of such, see Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default… November 30th, 2010.
...BoomBustBlogger Nick asked:
Reggie-
Do you have any reason as to why they are choosing 2013 as a deadline ? Seems like an arbitrary date.
Well, Nick, just follow the money or the lack thereof…
So, what debt raising and servicing that was unsustainable in 2010 was lent even more debt to become even more unsustainable. The chickens come home to roost in 2013, post IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding bailout! What Angela in Germany was alluding to was what all in the know, well… know, and that is that Ireland is already in default and those defaults have been purposely pushed out until 2013. Angela simply (and wisely from a local political perspective, although unwisely from a global geopolitical standpoint) admitted/suggested was that the defaults will be pre-packaged and managed ahead of time. The EU politbureau insists that politics rule the day, and no prepackaged structure be in place for the Irish defaults to be. This means the potential foe even more carnage through the pipelines of uncertainty!
The Mathematical Truth Concerning Portugal’s Debt Situation
Before I start, any individual or entity that disagrees with the information below is quite welcome to dispute it. I simply ask that you com with facts and analysis and have them grounded in reality so I cannot right another “Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!“. In other words, come with the truth, or at lease your closest simulacrum of it.
In preparing Portugal’s sovereign debt restructuring model through maturity extension, we followed the same methodology as the Greece’s sovereign debt maturity extension model and we have built three scenarios in which the restructuring can be done without taking a haircut on the principal amount.
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- Restructuring by Maturity Extension – Under this scenario, we assumed that the creditors with debt maturing between 2010 and 2020 will exchange their existing debt securities with new debt securities having same coupon rate but double the maturity. Under this type of restructuring, the decline in present value of cash flows to creditors is 3.3% while the cumulated funding requirements and cumulated new debt between 2010 and 2025 are not reduced substantially. The cumulated funding requirement between 2010 and 2025 reduces to 120.0% of GDP against 135.4% of GDP if there is no restructuring. The cumulated new debt raised is reduced marginally to 70.6% of GDP from 72.2% of GDP if there is no restructuring. Debt at the end of 2025 will be 104.8% of GDP against 106.1% if there is no restructuring
- Restructuring by Maturity Extension & Coupon Reduction – Under this scenario, we assumed that the creditors with debt maturing between 2010 and 2020 will exchange their existing debt securities with new debt securities having half the coupon rate but double the maturity. The decline in the present value of the cash flows is 18.6%. The cumulated funding requirement between 2010 and 2025 reduces to a potentially sustainable 99.5% of GDP and the cumulated new debt raised will decline to 50.1% of GDP. Debt at the end of 2025 will be 88.6% of GDP (a potentially sustainable).
- Restructuring by Zero Coupon Rollup – Under this scenario, the debt maturing between 2010 and 2020 will be rolled up into one bundle and exchanged against a single, self-amortizing 20-year bond with coupon equal to 50% of the average coupon rate of the converted bonds. The decline in the present value of the cash flows is 17.6%. The cumulated funding requirement between 2010 and 2025 reduces to 100.1% of GDP and the cumulated new debt raised will decline to 52.8% of GDP. Debt at the end of 2025 will be 90.9% of GDP (a potentially sustainable).
The scenarios above were also calculated using the haircuts necessary to bring debt to GDP below a pre-selected level (user selectable in the model, 80%, 85% or 90% - please keep in mind that a ceiling of 60% was necessary in order to gain admission into the Euro construct). We have also built in the impact of IMF/EU aid on the funding requirements and new debt raised from the market between 2010 and 2025 under all the scenarios.
A more realistic method of modeling for restructuring and haircuts
In the previously released Greece and Portugal models, we have built relatively moderate scenarios of maturity extension and coupon reduction which would be acceptable to a large proportion of creditors. However, these restructurings address the liquidity side of the problem rather than solvency issues which can be resolved only when the government debt ratios are restored to sustainable levels. The previous haircut estimation model was also based on the logic that the restructuring of debt should aim at bringing down the debt ratios and addition to debt ratios to more sustainable levels. In the earlier Greece maturity extension model, the government debt at the end of 2025 under restructuring 1, 2 and 3 is expected to stand at 154.4%, 123.7% and 147.0% of GDP which is unsustainably high.
Thus, the following additional spreadsheet scenarios have been built for more severe maturity extension and coupon reduction, or which will have the maturity extension and coupon reduction combined with the haircut on the principal amount. The following is professional level subscscription content only, but I would like to share with all readers the facts, as they play out mathematically, for Portugal. In all of the scenarios below, Portugal will need both EU/IMF funding packages (yes, in addition to the $1 trillion package fantasized for Greece), and will still have funding deficits by 2014, save one scenario. That scenario will punish bondholders severely, for they will have to stand behind the IMF in terms of seniority and liquidation (see How the US Has Perfected the Use of Economic Imperialism Through the European Union!) as well as take in excess of a 20% haircut in principal while suffering the added risk/duration/illiquidity of a substantive and very material increase in maturity. Of course, we can model this without the IMF/EU package (which I am sure will be a political nightmare after Greece), but we will be recasting the “The Great Global Macro Experiment, Revisited” in and attempt to forge a New Argentina (see A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina).
Here is graphical representation of exactly how deep one must dig Portugal out of the Doo Doo in order to achieve a sustainable fiscal situation. The following chart is a depiction of Portugal’s funding requirements from the market before restructuring…
This is the same country’s funding requirements after a restructuring using the "Restructuring by Maturity Extension″ scenario described above…
And this is the depiction of new debt to be raised from the market before restructuring…
And after using the scenario “Restructuring by Maturity Extension″ described above… For all of you Americans who remember that government sponsored TV commercial, “This is your brain on drugs. Any Questions?“
The full spreadsheet behind all of the calculations, scenarios, bond holdings and calculations can be viewed online here...
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