Portugal, greece and the euro crisis   what the news are
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Portugal, greece and the euro crisis what the news are

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Portugal is under increasing stress after the rejection of a third austerity plan by its Parliament. ...

Portugal is under increasing stress after the rejection of a third austerity plan by its Parliament.

Greece's budget deficit reduction is not starting well in 2011, and the latest figures smell manipulation (with the EU blessing)

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Portugal, greece and the euro crisis   what the news are Portugal, greece and the euro crisis what the news are Document Transcript

  • http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/ Portugal, Greece and the EURO crisis What the news are?1. PortugalDespite repeated attacks against the euro, it has rather well survived so far, mainly thanksto the ECB buying PIGS sovereign debt in the open market, the bailout of Greece andIreland and an agreement reached at the EU Summit in Brussels on March 11 thatunveiled a plan to expand the EU bailout fund (the ESM) to EUR 700 billion on apermanent basis, up from the EUR 440 billion EFSF mechanism currently in place thatonly has an effective EUR 250 billion lending capacity.However, EU politicians are delaying until June the announcement of details on how itwill finance the interim EFSF mechanism that must address sovereign debt issues in theperiod from now until the ESM goes into effect in mid-2013. This is happening at a timewhere Portugal Government had to resign.Portugal has long been the next in line since the crisis publicly emerged in 2010: Last weekPrime Minister Jose Socrates had to quit following his defeat before the parliament over athird round of austerity measures did not trigger a wave of euro selling beyond a shortlived small dip. From what I read, Portugal can match EUR 4.5 billion of debtbecoming due in April; things might be more difficult for the EUR 4.9 billiondue in June at a time when the next election should take take place. As aconsequence, rating agencies downgraded Portugal and CDS increased. A bailout ofPortugal would require ~ EUR 70 billion.June looks like a key month, if markets wait until then, which I doubt. However, alwayswatch interest rate differentials (real or anticipated) with the USD which are currentlysupportive of the euro. 1
  • http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/ 2
  • http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/PIGS economies are at best anemic and I do not see how long they can sustain highunemployment, high interest rates and negative growth without bond investors having topay their share of any debt rescheduling (in essence debt rescheduling is what ishappening with Greece right now: interest rates lowered by EU Finance Ministers anddebt maturity lengthened; this is a bailout that will be paid for by European taxpayers).2. GreeceIt is always interesting to look at number beyond the large prints shouted at the media bypoliticians.“According to the data available for the State Budget execution for the two monthsJanuary – February 2011, on a fiscal basis, the State Budget deficit is Euro 55million lower than the target set in the 2011 Budget for the first two months of theyear. The two first months 2011 State Budget deficit amounts at Euro 1,024 millioncompared to a Euro 1,076 million target.The 2011 State Budget deficit has grown – as expected – by 8.5% compared to the2010 deficit during the same period, as a result of the non repetition of some measures aswell as the higher than projected GDP decline during the last quarter of 2010, which hasbeen recently revised for the whole year by ELSTAT.” [emphasis mine]Down the press release, the explanation is given for this good performance despite a worsethan expected economic situation and decreasing tax receipts.“Public Investment Budget (P.I.B.) revenues increased by 354.5% and P.I.B. expendituresdeclined by 67.9%”After all, nothing really abnormal, good management; well, look at the table below: 3
  • http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/One will notice that this good performance comes from the PIB deficit that turned to bepositive: since I started to look at the Greek Budget (2009), this item hasalways been negative but for one month in 2009 and 2010 -for figures rathermeaningless- and suddenly it becomes hugely positive when headline numbersare awful (revenues substantially down at - 9.1% and expenditures up at +3.3%) and wellbelow what was planned. If one compares the actual number to the target, we aretotally out of line: + 604 x for PIB revenues and -70% for expenditures!! Theyeither got their math wrong or it smells manipulation; the PIB item is quite easy tomanipulate (just postpone investments and cash in revenues ahead).Let see whether this rather long quite period for the euro will last much longer (probably abit since markets still anticipate a rate hike in the eurozone). 4
  • http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/Source:Greek Ministry of Finance: State Budget Executionhttp://www.minfin.gr/content-api/f/binaryChannel/minfin/datastore/fc/a6/88/fca688dfad038ce88efd687c303b6968f2c0251b/application/pdf/Preliminary_Bulletin_02_2011_Eng.pdfMarkit: CDS market summaryhttp://www.markit.com/cds/cds-page.htmlSaxo Bank: The EU and the siren song of the expected outcome CDS 5 yr cost and PIIGS 2 yr yieldsBloomberg: Portuguese Bonds Slide as Prime Minister Quits on Budget, Fitch Downgradeshttp://www.bloomberg.com/news/2011-03-24/bunds-rise-on-safety-demand-as-portugal-s-prime-minister-quits-over-cuts.html 5