In the rest of world we had Dubai, then Greece, now Ireland, next Portugal, and based on its 20% unemployment rate - hello Spain! I guess until it's a big economy like Spain no one will care much. We are becoming immune to the bailouts. Heck Irish debt was blowing out for a month, and the U.S. market could only rally. [Nov 9, 2010: Irish 10 Year Bonds Blow Out to Nearly 8%, 5.6% over German Rate - Market Shrugs] Then when it reacted to Ireland, it was a whopping 3 day event. Why react anymore when the whole world is one moral hazard - do as you please, take whatever risks necessary - the taxpayer will clean up the mess if it blows up. If not - you keep the winnings Mr. Investor.
Now that there is "European intergalactic TARP" in place (ESFS) combined with IMF funds (thank you U.S. taxpayer), and a central bank in Europe who kicks the can down the road until the rescues come, we just continue to dance because the music never will be allowed to stop. The Germans and French want to actually tell bondholders that after 2013 they might actually be responsible for their investment decisions and face losses on bonds in the future. The bond market is recoiling in horror at this concept! How dare they ask this of us! The irony for these European states is if they had never created the EU, there would be "no problem" (using the U.S. as an example). They could all be mini U.S.', Japans, and U.K's and just print their way to 'prosperity'. But being stuck under a common currency, you cannot run on a printing press 24/7- which is a bummer.
Speaking of .... we'd be having our own Greece, Ireland and the like if not for the now annual "stimulus" plans (just don't call it that anymore) funneling money into our great states of California, Illinois, and the like the past few years. And don't forget the subsidy of Build America Bonds. Unfortunately our states cannot print money so they still rely on the largesse of federal government. Since there is no price discovery anymore in the bond market as everything is based on the Federal Reserve pushing prices wherever they want... and the assumption anything on Earth that moves will be bailed out, I have no idea on the eventual outcomes to the states. Until the GOP took back power and even a tiny threat of not sending taxpayer money to the states surfaces, muni bonds were trading as if there was not a worry in the world. Trying to think things throuhg on any of idealistic free market principles, is long gone in Cramerica.
But returning to Europe, we have solved nothing except bought more time (kicking can) under the global pretend and extend - no bondholder has taken a haircut... and frankly most of the bondholders are banks. Hence these "sovereign" bailouts are effectively of the banking kind (yet again). Because these global banks apparently have the whole world over a barrel - can't mess with them, because then we get tiny things like global financial contagion - so keep working "banking socialism" (take from the taxpayer to give to the bank) until at some point, some problem gets to big to bail out. Or someone is willing to take a haircut.
For now, we await the bailout of Portugal - based on the window between Greece and Ireland, we should be enjoying this event circa Memorial Day 2011 or earlier. Those EU regulators should just get their tickets to Lisbon now - when you pay that far in advance you get some nice discounts. For now, you know the pattern ... the finance minister of Portugal will deny they have any issues... then as pressure mounts will say they never have talked to anyone in the EU or IMF about bailouts... pinkie swear. Then an emergency meeting will be called. Then arm wrestling will ensue. Then the U.S. stock market will sell off for 18 minutes over the issue. Then a rescue, which solves nothing in real terms. Then we wait for Spain. Rinse. Wash. Repeat. .
- A resolution of the Irish debt crisis may shift the burden of speculation to Portugal. While officials such as European Central Bank Vice President Vitor Constancio predict a bailout of Ireland will reduce financial pressures in the euro region, analysts from Citigroup Inc. and Nomura International Plc say any relief would be short-lived as investors turn their focus to the next-weakest peripheral nation.
- The markets indicate that country is Portugal with 10-year bond yields of 6.89 percent, compared with 8.25 percent in Ireland and 11.67 percent in Greece, which received rescue funds in May from the European Union and International Monetary Fund.
- Portuguese Finance Minister Fernando Teixeira dos Santos said Nov. 15 that while “there is a risk of contagion,” that doesn’t mean the country will seek financial aid.
- Portugal has made less progress at taming its deficit than some of the other peripheral nations. In the first nine months, the central government’s deficit rose 2.3 percent from a year earlier. That compared with a decline of more than 40 percent in Spain and more than 30 percent in Greece.
- While Portugal has no plans to sell more bonds this year, so-called market vigilantes drove up yields on its debt during the past month amid doubts about the country’s efforts to reduce the budget deficit. The 10-year yield reached a euro-era record of 7.25 percent on Nov. 11, 484 basis points higher than benchmark German bunds of similar maturity.
- While Irish and Portuguese bonds probably would rise with a bailout agreement for Ireland, any gains wouldn’t change the underlying problems for peripheral Europe, according to Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank. “Wait a few weeks and the markets will just go for someone else, with Portugal at the front of the queue,” London-based Diebel said. “The vigilantes pushed Ireland into the same situation Greece is in. Why would you conclude they won’t do the same to Portugal?”
- Ireland’s debt crisis was triggered by the rising cost of bailing out the nation’s banks, including Anglo Irish Bank Corp. and Allied Irish Banks Plc. While Portugal doesn’t face a crisis in its financial industry, it has a larger debt burden and the country has almost 10 billion euros of debt that comes due during the first half of 2011, data compiled by Bloomberg show.
- “Portugal needs more cash than Ireland does because they go to the market on a regular basis,” said Nick Firoozye, head of interest-rate strategy at Nomura in London. “The market may move onto Portugal at some point because it’s significantly at risk.”
- While Ireland started to reduce spending in 2008, Portugal has been slower to address its fiscal deficit, the fourth- largest in the euro region, and the government failed to reach an agreement with its biggest opposition party on the 2011 budget plan until the end of last month.
- Portugal has proposed to lower its total wage bill for public workers by 5 percent, freeze hiring and raise the so- called value-added tax by 2 percentage points to 23 percent.
[Dec 13, 2009: Bond Vigilantes Prowling Europe]