Wednesday, February 3, 2010

Portugal's Debt Costs Rise to 11 Month High

Another reason to like the dollar (v the Euro) in the near term is the realization that quite a few member states of the European Union are in a word (BLEEP)'ed!  The irony is the United States is in just as bad of shape; in fact California has the same credit rating as Greece.  But the world still regards the US as the safe haven - even though when you put our unfunded liabilities on the balance sheet we are in horrific shape.

That said, it is what it is for now and there are no great alternatives in the largest currencies - Japan is a mess, Europe has a handful of member states who are spiraling out of control, the UK is a mini US, and the US is the US.  The currency markets of Australia, Norway, or Canada are not places huge amounts of capital can flow into - so it appears the US it is.  For now.

While Greece is receiving all the attention, remember it's a PIIGS situation - Portugal, Ireland, Italy, Greece, Spain. [Dec 13, 2009: Bond Vigilantes Prowling Europe]  Portugal's economy is actually smaller than that of Greece (which in and of itself is only 3% of the EU) - the big fish will be Spain and then eventually Italy.  (Germany, France, Italy and Spain are 75% of EU GDP)  Remember, unlike the United States - these countries within the EU cannot just throw their citizens under the bus, and print more money to "fix" the issues ala Japan, US, and UK. [Apr 23, 2009: Britain's Deficit Reaches World War 2 Levels; Very Little Room to Maneuver]

These are all outstanding issues, when they exactly matter to the markets is unknown - but they are building up slowly and surely, and the contagion effect once the dominos start to fall should make life very interesting. Sovereign debt will be to some year in the 2010s what subprime mortgages was to 2008. For now this debt situation in these EU states will feed on itself:  as perceived risks increase, borrowing costs will increase.  Which in turn accelerates the deficit problems.  A vicious circle indeed. If you think it doesn't matter to you - think again.  First, it will affect world markets; second, this is the same fate the United States is facing "eventually".  [Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12]  If you think the US budget deficit is an issue now just wait until it costs substantially more to get foreigners to buy our debt.  Interest expense as a % of our yearly budget will be shooting up, crowding out the ability to pay for other things.

If you are wondering where the US stands - with the recent increase in the debt ceiling (which will take us through the end of 2010 - before the next increase will be voted through) we're going to be at 100% of GDP.  [Jan 28, 2010: Senate Votes to Increase Debt Ceiling to $14.3 Trillion]  And that's pretending Medicare & Social Security don't exist.  If you include those, according to we have a $54.8 TRILLION shortfall aka 400% of GDP. Which again is why it's bordering on dark humor that people are fleeing into the US as a 'safe harbor'. 

But for today- an eye on Portugal.

via Bloomberg
  • Portuguese bonds slid, pushing the yield on the 10-year note up by the most in 11 months, as the country’s borrowing costs soared at a sale of bills on concern the government will fail to curb its budget deficit.
  • The decline sent the yield on the security to the highest since March, increasing the premium investors demand to hold the debt instead of benchmark German bunds to 147 basis points as of 4:17 p.m. in London, a 10-month high.
  • “The news flow for Portuguese government bonds is rather negative,” said David Schnautz, an interest-rate strategist in Frankfurt at Commerzbank AG. “There is a decent upward risk in spread terms for Portuguese bonds. They could go much further.”
  • Portuguese central bank Governor Vitor Constancio said yesterday that cutting the budget deficit will require “difficult” measures and that the economy is unlikely to catch up with its European peers any time soon.
  • Portugal’s public debt will rise to 91 percent of gross domestic product by 2011 from 77 percent last year, (again, the US is well ahead of Portugal - but we have a printing press with a man at the helm not afraid to use it) according to European Commission forecasts. Greece’s debt will increase to 135 percent of GDP, from 113 percent, and Spain’s will increase to 74 percent from 54 percent, the EU said.
  • The bonds of some of the weakest economies in the euro- region have dropped in the past two months on concern nations will fail to meet their debt commitments. The premium that investors demand to hold Greek 10-year bonds over bunds rose to an 11-year high of 396 basis points on Jan. 28 on speculation the Greek government won’t do enough to narrow a budget deficit that’s the biggest in the European Union.

[Dec 10, 2009: Ken Rogoff (Videos) - Sovereign Debt Defaults Likely in Next Few Years]
[Dec 10, 2009: Global News - Ireland takes Responsible Budget Steps, Spain the Next to Worry About]
[Dec 8, 2009: Greek Fiscal Situation Continues Slow Boil]
[Dec 1, 2009: Morgan Stanley Lists UK Sovereign Debt / Currency as Potential "Fat Tail" Risks for 2010]
[Nov 27, 2009: UK Telegraph - Greece Tests the Limits of Sovereign Debt as it Grinds Toward Slump]
[Sep 17, 2009: Ireland to Spend 28% of GDP to Suck up Banking Toxic Assets]

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