As goes Greece…
And Ireland…
So goes Portugal?
As Gary Jenkins over at Evolution Securities reminds us, it took Greece and Ireland less than a month to request EU/IMF aid after their 10-year bond yields breached that all-important 7 per cent level (as indicated in the charts above). Though it’s worth noting that Portugal has been through the 7 per cent barrier a couple of times before and saw yields decline after.
Nevertheless, all eyes are on the Club Med member this week.
From Nomura’s Jens Nordvig:
Given weak growth, poor debt dynamics, and deteriorating market access, it seems likely that Portugal will need a bailout in some form relatively soon. The debt dynamics looked border-line sustainable at the funding rates available in early 2010. But with a funding cost of 7% (the 10yr rate after the latest spike in yields), the debt arithmetic is shifting towards an unsustainable equilibrium. In addition to this, there is the bank liquidity issue. Portuguese banks increased their use of ECB liquidity facilities to around €50bn when European markets froze up in May-June. The latest ECB data (from November) show a use of €40bn, and we would expect that this is now rising again.
How soon could we see a Portugal bailout?
Portuguese officials have denied as recently as Sunday that Portugal will need a bailout. This means that things will probably have to get worse before a formal request for aid is made. Key tests will be the bond auctions, which are scheduled for this Wednesday (€1-1.5bn), followed by T-bill redemptions on January 21 (€3.4bn) and on February 18 (€3.8bn). Further deterioration in market sentiment around those events could see Portugal apply for aid from the EU/IMF.
In this context, it is worth noting that the ECB appears unwilling to use bond purchases to impact market sentiment. The ECB did step up its bond purchases around the last ECB press conference on December 2 when market conditions were deteriorating very rapidly. But there has been no evidence of a more active ECB over the past week. In fact, its pace of bond purchases has moderated again after spiking in the first half of December. This suggests that the ECB will not be acting in a way that will delay a request for aid.
Related links:
Portugal under pressure to seek EU/IMF aid – Reuters
Portugal bond-buying estimates du jour – FT Alphaville
Europe’s 2011 pressure points - FT Alphaville