RSS

Advertisement

Presenting ‘The Portuguese Liquidity Trap’.

  • Written by Syndicated Publisher 287 Comments287 Comments Comments
    March 16, 2012

    In this followup to Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot I think we should get straight to the point – Anyone who doesn’t believe that Portugal is clearly set up to for a bond route, and that it is seriously considering a default is either lying to themselves, believe human nature has changed, and/or really hasn’t bothered to review the math. Here’s proof of a Portuguese default presented with logic, numbers and pretty colorful graphs. The full spreadsheet behind all of the calculations, scenarios, bond holdings and calculations can be viewed online here (click this link) by professional level subscribers. Click here to subscribe or upgrade.

    For one, we are on up to the 3rd Greek Bailout (Portugal has only received one hence it could be getting envious:-)). Portugal has had extreme austerity measures inflicted upon it. So extreme that it has materially and significantly depressed the economy. Portugal’s GDP growth contracted even further by 1.3% q/q in Q4. Its HICP Moderated to 3.4% y/y in January. Very high unemployment (currently at 14% and rising), weakening wages, and a total dearth of credit to businesses and households (do you really think bond-busted banks are lending to and within Portugal like the good ‘ole days) will lead to a downward spiraling self-fulfilling prophecy that is the antithesis of what appears to be driving all of those rosy estimates behind reports that Portugal won’t default. I do mean rosy, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for examples. Let it be known that instead of growing the economy out of the doldrums, Portugal’s austerity measures will push it down the drain.
    It’s gotten so bad that even the rating agencies are on board the truth train (Rating Agencies vs Reggie Middleton, Part 3). After Moody’s downgraded Portugal, all three major agencies have it at junk, of course a year later than said information would have been useful. The massive liquidity injections by the ECB have prevent the market from imploding, but has also failed to rectify the problem, rather they simply feed the appetite of an addicted pig in the form of banks and sovereigns that rely on cheap/free money without the requisite market disciplines of risk wieghting and respect for the cost of capital.

    Due to total reliance on funny munny from the ECB, required due to the lack of external financing avialable from the markets (unless Portugal defaults/restructures and starts from scratch, which is inevitable anyway) the Portuguese machine will still be in arrears accumulation mode – a mode which is essentially unsustainable.

    Despite what I see as practically unassailable facts, the MSM is still steadfastly and unrealistically bullish, as per Bloomberg, Portugal Bond Rout Overstates Greek Likeness. Well, the Portugal Bond Yield is at 13% Despite Greek Deal - that’s right, the 3rd Greek deal and one that include 74% haircut!!! Portugal will default/restructure and there’s a very, very strong chance that right behind them will be Spain and then Greece again. That’s right, Greece, again!

    Who was right about the Greek default, running against the consensus two years ago? See 2010 posts - Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! and then A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina. In The Anatomy of a Portugal DefaultA GraphicalStep by Step Guide … I walked through the financial tangle that is Portugal about two years ago, as excerpted.

    This is the carnage that would occur in the OPTIMISTIC if the same restructuring were to be applied to Portugal today.

    Yes, it will be nasty. That 35% decline in cash flows will be levered at least 10x, for that is how much of the investors in these bonds purchased them. A 35% drop is nasty enough, 35% x 10 starts to hurt the piggy bank! As a matter of fact, no matter which way you look at it, Portugal is destined to default/restructure. Its just a matter of time, and that time will probably not extend past 2013. Here are a plethora of scenarios to choose from…

    This is Portugal’s path as of today.

    Even if we add in EU/IMF emergency funding, the inevitability of restructuring is not altered. As a matter of fact, the scenario gets worse because the debt is piled on.

    Well, I took said model and updated it with recent historical GDP results as well as projections which incorporated the most recent developments. Do you think things look better or worse?

    This is what Portugal’s situation looks like today…

    image012image012

    The Portuguese bond yield has spiked since the Greek deal. Methinks Mr. Credit market (who is much wiser than Mr. Eqiuity market, probably due to the increased difficulty in manipulating Mr. Credit’s demeanor) seems to agree with Reggie…

    image011
    These are the Portuguese bonds used in the calculations. Professional subscribers can access the full model and all of the stuff that went into it via the link at the bottom of this article - Introducing the Not So Stylish Portuguese Haircut Analysis.
    Issuer Issue date Maturity Amt Out(M) Interest Due(M) Years to maturity Coupon rate
    Portugal Treasury Bill 07/17/09 7/23/2010 4.50 0.00 -1.64 0.000%
    Portugal Treasury Bill 09/18/09 9/17/2010 2.75 0.00 -1.49 0.000%
    Portugal Treasury Bill 11/20/09 11/19/2010 3.10 0.00 -1.31 0.000%
    Parpublica – Participacoes Publicas SGPS 12/16/05 12/16/2010 0.51 0.01 -1.24 2.690%
    Portugal Treasury Bill 01/22/10 1/21/2011 2.05 0.00 -1.14 0.000%
    Portugal Treasury Bill 02/19/10 2/18/2011 2.35 0.00 -1.06 0.000%
    Portugal Treasury Bill 03/19/10 3/18/2011 2.03 0.00 -0.99 0.000%
    Portugal Obrigacoes do Tesouro OT 11/16/05 4/15/2011 4.67 0.15 -0.91 3.200%
    Portugal Obrigacoes do Tesouro OT 03/13/01 6/15/2011 4.96 0.26 -0.74 5.150%
    CP – Comboios de Portugal EPE 02/26/02 2/26/2012 0.25 0.00 -0.04 0.990%
    Portugal Obrigacoes do Tesouro OT 02/13/02 6/15/2012 7.64 0.38 0.26 5.000%
    Portugal Government International Bond 08/28/09 8/28/2012 0.41 0.00 0.46 2.400%
    Parpublica – Participacoes Publicas SGPS 07/08/09 7/8/2013 0.80 0.03 1.32 3.500%
    Polo III-CP Finance Ltd 07/29/03 7/29/2013 0.10 0.00 1.38 4.500%
    Ana-Aeroportos de Portugal SA 08/28/09 8/28/2013 0.10 0.00 1.46 4.050%
    Portugal Obrigacoes do Tesouro OT 05/22/98 9/23/2013 7.16 0.39 1.53 5.450%
    Portugal Obrigacoes do Tesouro OT 10/29/03 6/16/2014 6.00 0.26 2.26 4.375%
    Polo Securities II Ltd 06/26/02 6/26/2014 0.31 0.00 2.29 2.880%
    ANAM – Aeroportos da Madeira SA 07/29/04 7/29/2014 0.05 0.00 2.38 5.340%
    Parpublica – Participacoes Publicas SGPS 10/15/04 10/15/2014 0.50 0.02 2.59 4.191%
    Portugal Obrigacoes do Tesouro OT 06/03/09 10/15/2014 5.32 0.19 2.59 3.600%
    Portugal Government International Bond 11/17/09 11/17/2014 0.08 0.00 2.68 3.064%
    Parpublica – Participacoes Publicas SGPS 12/18/07 12/18/2014 1.02 0.03 2.77 3.250%
    Refer-Rede Ferroviaria Nacional SA 03/16/05 3/16/2015 0.60 0.02 3.01 4.000%
    Portugal Government International Bond 03/25/10 3/25/2015 1.02 0.04 3.03 3.500%
    Polo III-CP Finance Ltd 07/29/03 7/29/2015 0.30 0.01 3.38 4.700%
    Portugal Obrigacoes do Tesouro OT 07/13/05 10/15/2015 7.64 0.26 3.59 3.350%
    Portugal Government International Bond 10/24/86 5/20/2016 0.18 0.02 4.19 9.000%
    Portugal Government International Bond 05/20/86 5/20/2016 0.18 0.02 4.19 9.000%
    Portugal Obrigacoes do Tesouro OT 07/17/06 10/15/2016 5.00 0.21 4.60 4.200%
    Portugal Obrigacoes do Tesouro OT 05/03/07 10/16/2017 6.08 0.26 5.60 4.350%
    Portugal Obrigacoes do Tesouro OT 03/04/08 6/15/2018 6.27 0.28 6.26 4.450%
    Refer-Rede Ferroviaria Nacional SA 02/18/09 2/18/2019 0.50 0.03 6.94 5.875%
    Portugal Obrigacoes do Tesouro OT 03/03/09 6/14/2019 6.86 0.33 7.26 4.750%
    CP – Comboios de Portugal EPE 10/16/09 10/16/2019 0.50 0.02 7.60 4.170%
    Portugal Government AID Bond 03/08/90 2/25/2020 0.01 0.00 7.96 1.520%
    Portugal Obrigacoes do Tesouro OT 02/17/10 6/15/2020 5.26 0.25 8.26 4.800%
    Parpublica – Participacoes Publicas SGPS 09/22/05 9/22/2020 0.50 0.02 8.54 3.567%
    Parpublica – Participacoes Publicas SGPS 12/28/05 12/28/2020 0.15 0.00 8.80 2.423%
    Portugal Obrigacoes do Tesouro OT 02/23/05 4/15/2021 7.08 0.27 9.10 3.850%
    Refer-Rede Ferroviaria Nacional SA 12/13/06 12/13/2021 0.50 0.02 9.76 4.250%
    Portugal Obrigacoes do Tesouro OT 06/10/08 10/25/2023 6.53 0.32 11.63 4.950%
    Refer-Rede Ferroviaria Nacional SA 10/16/09 10/16/2024 0.50 0.02 12.60 4.675%
    Refer-Rede Ferroviaria Nacional SA 11/16/06 11/16/2026 0.60 0.02 14.69 4.047%
    Parpublica – Participacoes Publicas SGPS 11/16/06 11/16/2026 0.25 0.01 14.69 4.200%
    CP – Comboios de Portugal EPE 03/05/10 2/5/2030 0.20 0.01 17.91 5.700%
    Portugal Obrigacoes do Tesouro OT 03/22/06 4/15/2037 6.97 0.29 25.11 4.100%
    Governo Portugues Consolidado 01/01/40 1/29/2049 0.00 0.00 36.91 3.987%
    Governo Portugues Consolidado 02/01/42 2/28/2049 0.01 0.00 36.99 2.997%
    Governo Portugues Consolidado 03/15/43 3/29/2049 0.00 0.00 37.07 2.764%
    Governo Portugues Consolidado 12/01/41 12/29/2049 0.00 0.00 37.82 3.520%

    Images: Flickr (licence/attribution)

    About The Author

    Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts to uncover truths, seldom if, ever published in the mainstream media or Wall Street analysts reports. Since the inception of his BoomBustBlog, he has established an outstanding track record

Advertisement

Closed Comments are currently closed.