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Generational Dynamics Web Log for 7-Apr-2011
7-Apr-11 News -- Portugal requests bailout after disastrous bond auction

Web Log - April, 2011

7-Apr-11 News -- Portugal requests bailout after disastrous bond auction

Spain will be the new target of 'the markets'

Sorry for the delay in posting this -- the need for sleep ruled.

Portugal requests bailout after disastrous bond auction

As late as Wednesday morning, Portugal's finance ministry was saying that the country can meet all its financing needs without any aid from the European Union, and that there were no plans to ask for a bailout, according to the Wall Street Journal (Access).

Portugal's prime minister José Sócrates on Wednesday

Portugal's prime minister José Sócrates on Wednesday

However, several hours later, Portugal's prime minister José Sócrates announced that Portugal would ask for a bailout. Portugal thus becomes the third eurozone country, after Greece and Ireland, to require rescue. Socrates is quoted by the Associated Press as follows:

"I want to inform the Portuguese that the government decided today to ask ... for financial help, to ensure financing for our country, for our financial system and for our economy ...
This is an especially grave moment for our country ... and things will only get worse if nothing's done."

Portugal, which needed no aid whatsoever in the morning, suddenly needed €80 billion ($114.4 billion) by the end of the day. That must have been one hell of a three-martini lunch.

The immediate problem is that Portugal's government is obligated to repay a €4.5 billion loan that falls due later this month, and must make a €7 billion loan payment in June.

So Portugal tried to borrow €1 billion on Wednesday, by selling 12-month Treasury bills. The bills were all sold, but investors demanded yields (interest rates) of almost 6% -- an astronomical amount for 12-month bills. By comparison, yields on America's 12-month bills were at 0.28% on Wednesday, and yields on Germany's 12-month bills were at 1.32%.

Portugal's Treasury yields have been rising steadily for over a year, as we reported last week. Yields on Portugal's 10-year bonds were at 8.54% on Wednesday. (See "1-Apr-11 News -- Portugal's and Ireland's bond yields soar, but VIX remains low.")

There was really never any doubt that Portugal would need to be bailed out at some point. What's only remarkable is the lies and deception of the politicians who said that a bailout could be avoided. Or maybe that's not remarkable either, since lying and deception are the norms for politicians today, in Lisbon as in Washington and other capitals.

The following is a translation from an editorial titled "Who's next?" in El País (Madrid) in reaction to Portugal's announcement:

"The cold war between governments and financial markets continues, and markets continue to claim victims [in the form of high yields]: Greece 12.5%. Ireland, 8.9%. Portugal, 8.3%. Those are the three numbers of fear in Europe: the countries have been forced to seek assistance from the EU and the IMF. This is interest paid on public debt [bond yields] to 10 years: the best thermometer of fear in the markets that a default will occur is that investors are charging high interest rates. There is a fourth number, 5.2%: it is what Spain pays, which for months was identified as the next in the list. Italy and Belgium are not far from [Spain's situation].
The 10-year Spanish bond has an interest of 5.2% compared to the 8.3% for the Portuguese bond.
But Spain has, for the moment, distanced itself from the last fire in the markets that has swept Portugal away, thanks to the reforms undertaken since it has gotten out of the crisis (although the recovery is still fraught with danger) but also thanks to other intangibles. Spain is too big to fail; too big to be rescued. So it's likely that an attack on Spanish debt would be actually a threat to the whole euro: Spain is the boundary between the cold war and a full-scale conflict against the euro and against the European project.
And yet, the numbers -- and the [models], which to economists are equally or more important than numbers -- identify Spain as the next domino in the fiscal crisis. Athens asked for rescue in May, and immediately markets targeted Ireland. Dublin came six months later, in November. And Portugal was also unable to avoid the same self-fulfilling prophecy: it was next on the list and has been forced to ask for help just five months later. "Portugal has resisted because the bailouts did not work for Greece and Ireland, whose debt is still under pressure. But neither Portugal's reforms nor its crisis management has been suitable," said Angel Ubide, researcher at the Peterson Institute in Washington.
The problem is that Portugal worked as a shield for Spain. In the short term, pressure could resume on Spanish debt, although in recent weeks before the rescue we haven't seen any kind of infection. "The links between the Spanish and the Portuguese economy require think that the prospects for Spain are not independent of happens to Portugal. Still, markets will continue to differentiate between large and small countries: it is not as predictable contagion in the early stages of crisis," according to a note from Barclays Capital."

The tone of this editorial is quite remarkable. It never says anything remotely close to the truth -- that with 20% unemployment, and the crashing of a huge real estate bubble, Spain has no hope of paying off its debts without default.

The editorial simply blames "the markets." If only it weren't for those darn markets, the editorial implies, then we could continue going into debt forever.

Everybody knows not only that Spain will require rescue, but also that Spain is so big that a rescue will not be possible. According to the timetable described by the El País editorial, this crisis should occur in about six months.

The same debate is going on in Washington, as a possible government shutdown looms. One side is saying that we can keep spending as before. The other side is saying that it we cut a little here and there, then we can keep spending as before, and we'll have the darn problem solved by 2050, or by 2099 at the latest.

But the mathematics tells a different story. Before this crisis is over, Medicare, Medicaid, unemployment, food stamps, and other government social programs, will all be ended or effectively ended, since it will be impossible to pay for them any more, especially since all the nation's resources will be needed for fighting an existential war.

(Comments: For reader comments, questions and discussion, see the 7-Apr-11 News -- Portugal requests bailout after disastrous bond auction thread of the Generational Dynamics forum. Comments may be posted anonymously.) (7-Apr-2011) Permanent Link
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Generational Dynamics Web Log for 7-Apr-2011 7-Apr-11 News -- Portugal requests bailout after disastrous bond auction

Portugal requests bailout after disastrous bond auction

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Generational Dynamics Web Log for 7-Apr-2011
7-Apr-11 News -- Portugal requests bailout after disastrous bond auction