More on the topic du jour, Portugal.
Harvinder Sian at RBS has taken a stab at estimating the size of a bailout if (as many commentators now expect) the country does approach the IMF and the European Financial Stability Facility (EFSF).
Of course, it’s by no means clear that will happen.
Indeed, its not even clear if the resignation of Portuguese prime minister José Sócrates will trigger an election. The chances are it will, but we won’t know for sure until the president, Aníbal Cavaco Silva, meets the political parties on Friday.
However, that doesn’t stop us or Sian from making a rescue estimate:
There is still a great deal of uncertainty on the bailout cost total given that asset disposals by banks (and the degree of ECB balance sheet usage) are key in any calculations.
We estimate the total loan package size is in the order of €80bn, or 47% of GDP.
Now, the degree to which Portugal’s banks will needed to be funded by the sovereign rather than the European Central Bank is something of an unknown, admits Sian.
But, given ECB president Jean-Claude Trichet’s desire to wean addicted banks off ECB liquidity there’s a risk that Portugal is left to pick up the tab:
In Portugal’s case, the banks have not been able to issue bonds for some time and it is unlikely that the ECB will want to prop up Portuguese banks in the same way that Irish banks are supported via the ELA. This then puts the onus on the sovereign to take some of the bank bond burden – noting also that the Portuguese banking system is heavily reliant on the wholesale funding markets.
That’s almost €37bn of redemptions between 2011 and 2013.
So what about the market reaction?
Sian thinks Portugal’s government bonds are likely to converge to Irish levels:
The PGB long end (10y-30y) set to move to recovery pricing. The 30y bond was trading 67.545/69.060, and like Ireland we see value at 65 region. The 1y and 15y sector have further to fall. �
The main risk on the Portuguese curve is the front end as the market becomes anxious over coupon and redemptions, in a situation reminiscent of the Greek bailout concerns. The PGB curve has inverted on the 5s10s slope and we expect the curve to invert from 2y onwards
And here’s what that looks like.
Charts du jour, European bond yields – FT Alphaville
Portugal on the brink – FT Alphaville
ESM panic! Subordination, restructuring, CDS, oh my! – FT Alphaville