We can’t be a fly on the wall at Wednesday’s meeting in Berlin between Chancellor Merkel and José Sócrates so, dear readers, you will have to make do with this desk note from RBS.
(Emphasis ours.)
The Portuguese PM may be looking for some support in avoiding the EFSF but we think that he will meet only demands for austerity and probably a polite and private nudge to the idea that the EFSF is the only plausible solution, even if it means electoral suicide for Merkel’s guest today.
Ultimately, we think Portugal is doomed to face the EFSF, and while our focus has been on Spain because it matters a lot more for systemic risk, it is also because Portugal will not be seen as a credible candidate to avoid the EFSF on EC projections that show a 1% recession this year, but with an amazing 8% current account deficit.
We are not sure how the Merkel-Socrates diplomacy will be communicated to the markets but any idea that Merkel has left her guest hanging out to dry is set to see PGB spreads widen and perhaps test the 450bp mark at which LCH.Clearnet haircuts would kick-in.
Ah…. LCH.Clearnet haircuts.
Recall, LCH asked its members for more cash to trade Irish government bonds when the spread (over German bunds) hit 450 basis points in November. That hike and others saw the spread widen even further and caused some real ructions in the market as repo transactions were unwound and the bonds then posted as collateral at the ECB.
So, how close are PGB to the magic number of 450bps?
Not very as this chart from Bloomberg shows.
Related links:
S&P warns on Portuguese bail-out – FT