Monday, January 30, 2012

PIIGS: The Never Ending Story

Societe Generale's Michala Marcussen explains why Portugal, the next euro sandal to drop, is a much dicier problem than Greece: "In our opinion, the Portuguese government will bite the bullet and deliver deep reaching structural reform and austerity in 2012. The risk, however, is that even a successful program may not be enough to secure a sufficient decline in bond yields. That would leave only two options: (1) a second official [ECB, read German, bailout - The Balf] package or (2) PSI [public sector involvement, ie. investors "taking a haircut" - The Balf]. A firm commitment from euro area policymakers that Portugal will not see PSI and, if necessary, funds would be made available would clearly be helpful and push bond yields lower (and thus reduce the risk that an official second package would be needed!). The ECB warned on the dangers of Greek PSI and have been proven correct." As Zero Hedge (link at left), Mistubishi UFJ, and others have warned, Portuguese bonds issued under UK law represent a far greater amount of the total notional outstanding than in the case of Greece, and whereas Greek creditor protections depend on Greecy whimsy, UK law is written in stone a thousand years old.  If you think the current Greek bondholder negotiations (yes, still ongoing, March 20 is D-for default-Day) have been difficult, Portugese ones will be impossible.  Of course, the Eurozone might not even get to Portugal if Greece undergoes a disorderly default - or Germany bolts for the new deutschmark, already printed and being stored in the basement.