The seniority of Europe’s future bailout fund: no longer just tricky, more just plain terrorising the periphery.
Portugal… (downgraded to BBB- from BBB by S&P on Tuesday):
It is our view that high current account deficits accumulated over the past 10 years resulted in Portugal’s substantial net external indebtedness, with gross external debt exceeding 500% of current account receipts (CARs), and gross financing requirements exceeding 200% of CARs annually in the whole forecast period until 2014. In our view, these financing requirements make it likely that Portugal will access the European Financial Stability Facility (EFSF; AAA/Stable) and, in 2013, ESM funding.
…
If the government demonstrates that a macroeconomic program can realistically put the public debt trajectory onto a sustainable path, we are of the view, based on our reading of the concluding statement of the EC meeting, that Portugal may be able to obtain funding from the ESM without restructuring its existing debt in 2013 thus avoiding the timing disruption inherent in a restructuring. Nevertheless, any ESM borrowings would be senior to Portugal’s government bonds. The seniority of ESM borrowings (and the consequent subordination of government bonds) in our view reduces the prospect of timely repayment to government bondholders, and likely also results in lower recovery values.
Greece… (Ditto. BB- from BB+. Same day. Ouch):
We believe that the abovementioned pre-conditions of the ESM, against the background of Greece’s hefty government debt and high borrowing needs, undermine Greece’s plans to resume commercial borrowing by mid-2013, when the current EU/IMF program of official financial support terminates, and increase the likelihood of debt restructuring. Following the expiration of the initial program of official support, Greece is likely, in our opinion, to seek ESM funding.
At the same time, we note growing risks to Greece’s budgetary position, highlighted by what we view as the likely budgetary deterioration in 2010. The Greek government’s recently released provisional data on its 2010 general government balance indicate, in our view, a relatively higher cash deficit and larger outstanding spending arrears than planned. This suggests that last year’s general government deficit could exceed the government’s 9.6% of GDP target. Moreover, we believe that the government has not tightened spending controls sufficiently to prevent further accumulation of arrears in 2011. In addition…
And it goes on, a long litany of deficit failures that Greece needs a miracle to turn around.
The ESM failure in Brussels, of course, is now set in stone.
Well, we warned ya.
Related links:
That tricky ESM seniority – FT Alphaville
That tricky ESM seniority – still tricky – FT Alphaville