…debt ceiling punches back.
Results of Portugal’s latest debt auction are out — short-term 6- and 12-month securities, with yields of…
RTRS-PORTUGAL 12-MONTH T-BILL AVG YIELD 5.902 PCT (PVS 4.331 PCT) IN AUCTION
RTRS-RPT-PORTUGAL 6-MONTH T-BILL AVG YIELD 5.117 PCT (PVS 2.984 PCT) IN AUCTION
It’s more expensive for Portugal to issue its own debt for one year than it would be to take a five-year EFSF loan (5.7 per cent rate).
Oh dear. A government pension fund had been ready to buy the treasury bills, according to Portuguese media.
But where were the banks then? And how certain is it really that Portugal can actually survive to ask for an EFSF loan (probably in June) without triggering a credit event?
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Our main worry on Wednesday therefore is all this talk of the country’s banks pressing for a short-term, non-EFSF loan to sustain Portugal until June elections, since they claimed they couldn’t bear the risks of buying government paper any more.
First problem — we have no idea who else can give them this loan.
The reason it has to be non-EFSF, seemingly, is that there’s no government with the legitimacy (constitutionality?) to agree to fiscal conditions as part of a loan. Unfortunately…
Any IMF loan or credit line = conditions.
Any EFSM loan = conditions.
Any Greek-type set of bilateral EU loans (looking like the most realistic bet) = conditions.
There’s no precedent for a condition-less bridge loan to a sovereign, at least not one we know of. Thoughts welcome.
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The banks’ swearing off of government debt looks like an even bigger problem though. Tipping point time?
It seems a very strange time for them to turn cautious — they’ve long been stigmatised for their exposure to Portuguese sovereign debt and their reliance on ECB funding already. Furthermore, it’s not as if the ECB would throw out Portuguese paper as acceptable collateral if the rating agencies downgrade it to junk, as per recent Irish and Greek ratings waivers. Portugal could try financing via banks and the ECB collateral window until an EFSF loan is granted.
If the ECB isn’t a problem, and other banks already won’t touch these institutions, doesn’t that leave fear of an imminent credit event and a haircut on their holdings as the actual worry here?
If we look at the two Portugal bonds that are causing the trouble for short-term finances at the moment, you might well wonder.
There’s something very odd going on with yield on the €4bn ten-year paper redeeming on April 15, for example. Another €5bn of six-year debt coming due on June 15 is simply spiralling however thanks to movements over the last few days. There appears to be enough cash in reserve to pay off the April bond. We don’t hear so much about the June one however.
And if you look at recent CDS movements — Portugal only just trading wider than Ireland; more net exposure to Portugal than Ireland, as it happens, as Markit’s Lisa Pollack points out — this short-term risk is moving fast.
Related link:
Portugal’s negative cashflow - FT Alphaville
Europe’s grim sovereign-bank loop – FT Alphaville
