Or, asking the ‘If the ECB won’t, who will buy this stuff?’ question…
…and getting an ominous silence.
Charts via Laurent Fransolet of Barclays Capital:
They show that Portuguese investors bought the equivalent of their government’s total net issuance of debt in 2010 (banks about €10bn, insurers and so on about €5bn — both sets of institutions having had extremely few holdings before). Excluding the ECB, foreign investors liquidated €20bn of holdings last year, going from owning almost all Portuguese government debt in 2009, to about half of it in 2010.
A few points come to mind.
For a start, all that palaver about private placements of debt to some foreign investors earlier this year — well, it will not hold back the tide.
We could point out that Portuguese debt is living on borrowed time so long as the ECB perseveres with its bond-buying programme, which it won’t — but that’s rather obvious by now.
Instead, we’ll ask whether a bailout will help matters. Increasingly, we think not. Have you seen Irish bond yields lately? And unlike Ireland, Portugal’s problem is not one of banks going bust (there was no boom) but of long-term competitiveness. Hard for a bailout to solve, but easy for investors to use rescue loans as a cover to keep liquidating and stay away.
The last thing we’d note, therefore — the more that Portuguese debt exposure coalesces in domestic investors and the ECB, the easier it’s going to eventually be to restructure those holdings, and/or substitute collateralised bonds from the EFSF.
And remember of course, what’s coming in 2013. Standard & Poor’s warned on Tuesday that it’s keeping Portugal on a negative outlook, pending more details on whether Europe’s post-2013 bailout fund is going to be harsh in its lending conditions, and also senior to other investors in Portuguese debt.
Assuming they’re still there.
A Spanish interlude
If you want to see just how broken Portugal’s debt market is, just look towards what BarCap says about investor flows in Spanish government bonds — a different proposition. Click BarCap’s chart to enlarge:
Here too is a similar dynamic of foreign investors scaling back buying, from almost half of the share of purchases in 2009 to under a third in 2010. (Although in absolute terms, foreign investors are back to buying levels of just two years ago.) In response, domestic investors stepped forward to replace the lost demand. And by domestic investors — we don’t mean Spain’s banks, who have slashed their share (3 per cent of purchases in 2010, from 40 per cent last year).
For those worried about Spanish banks’ exposure to their sovereign (versus their property loans) that’s interesting.
But not a great reflection on the next-door neighbours.
As it happens, Portugal is selling around €750m to €1bn of treasury bills on Wednesday. It will return to the market in much greater force later this month, following the EU summit. Despite the collapse in long-term foreign demand, we fully expect the auctions to go well and for the debt to be quickly sold on to secondary markets, actually.
After all, that’s where the ECB will be waiting — and financing the eurozone’s sovereigns is its job nowadays, isn’t it?
Update (1105 GMT) — Results from Wednesday’s T-bill auction:
RTRS-PORTUGAL SELLS 550 MLN EUROS OF 6-MONTH T-BILLS IN AUCTION
RTRS-PORTUGAL SELLS 450 MLN EUROS OF 12-MONTH T-BILLS IN AUCTION
RTRS-PORTUGAL 6-MONTH T-BILL AVG YIELD 2.984 PCT (PVS 2.984 PCT) IN AUCTION
RTRS-PORTUGAL 12-MONTH T-BILL AVG YIELD 4.057 PCT (PVS 3.987 PCT) IN AUCTION
RTRS-PORTUGAL 6-MONTH T-BILL BID-COVER 2.6 (PVS 4.8)
RTRS-PORTUGAL 12-MONTH T-BILL BID-COVER 3.1 (PVS 1.9) IN AUCTION
The high yield, high bid cover phenomenon strikes again, incidentally.
The EFSF chief executive writes in… – FT Alphaville
A problem for Portugal, charted – FT Alphaville
Portugal, unmoored – FT Alphaville
Bail out Portuguese and Spanish banks together? – FT Alphaville