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Tuesday, 05 April 2011 04:48

The Pressure On Portugal Increases As Ratings Agencies Finally Arrive To The Fire Before The House Burns Down

From CNBC: Moody's Cuts Rating on Portuguese Sovereign Bonds

Credit rating agency Moody's cut Portugal's sovereign debt by one notch on Tuesday, saying it believed an incoming government would need to seek financing support from the European Union as a matter of urgency.Moody's cut its rating on Portugal's long-term government bonds to BAA1 from A3 and said the country's debt was still under negative review, with further downgrades dependent on Lisbon's ability to secure medium-term funding.

..."...Moody's believes that the government's current cost of funding is nearing a level that is unsustainable, even in the short-term," the ratings agency said on a statement.

...Portugal's president dissolved parliament last week and set June 5 as the date for the next polls, meaning the country is effectively in limbo for two more months.

...While Portugal can probably go on funding itself for the next eight weeks - it has to refinance 4.3 billion euros ($6.1 billion) of debt in April and 4.9 billion in June - the cost of doing so is likely to go on being punitively high.

Events are unfolding precisely as paying subscribers should anticipate. A quick recap:

  1. Portugal Is On The Verge Of Tapping Out, UFC Style – You Knew It Was Coming, Here’s The Analysis! Thursday, March 31st, 2011
  2. ECB Swallows Massive Portuguese Bond Losses As It Is Clear That The Third State Will Soon Join The Bailout Brigade – Haircuts, Here We Come!!! Friday, February 18th, 2011
  3. The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess Tuesday, February 15th, 2011

If one were to dig deeper into link number 1, above, you will see the impetus (with specificity) behind this next headline: CNBC - Portugal Banks Threaten to Shun Bonds: Report

Portugal's biggest banks will stop buying government bonds and are urging the caretaker administration to seek a short-term loan to secure financing until a June 5 election, business daily Jornal de Negocios reported on Tuesday.

Of course, its very expensive throw capital down the toilet when your crapper is full AND you run out of capital!


The heads of Banco Espirito Santo, Millennium bcp and Banco BPI met with the governor of the Bank of Portugal on Monday to pass on their views, Jornal said.

Hey, we've heard that name before, haven't we?

And this is why we've heard that name before... It ain't just Europe!

It appears the phenomenon is virulent and global - We've all been Bamboozled by the Banking Industry! Regardless, the Chickens are coming Home to roost!

And now, back to our regularly scheduled optimisim programming...

... But Carlos Santos Ferreira, head of Millennium bcp, Portugal's biggest private bank, said in a television interview late Monday that it was "indispensable that the country seeks a short-term loan".

... The cost of insuring Portuguese debt against default rose and 10-year Portuguese bond yields headed towards nine percent. "The government's current cost of funding is nearing a level that is unsustainable, even in the short-term," Moody's said in a statement. Lisbon will auction up to one billion euros of of 6- and 12-month Treasury bills on Wednesday.

"Game Over"

Jornal de Negocios ran a separate column on Tuesday titled "Game over, we have lost, Mr Engineer," referring to Prime Minister Jose Socrates who has insisted the country needs no outside help. Socrates vowed on Monday to keep resisting a foreign financial rescue for the debt-laden country, including the short-term loan suggested by the opposition.

Yeah! Okay...

Asked if a loan from the IMF was possible if the country faced immediate financing problems, Socrates told RTP television: "I don't know of any IMF financing line that would not enforce a programme with conditions. "All programmes that have been negotiated so far were very severe in terms of measures demanded from a country," he said.

What was originally borne from Europe may yet return. Am I the only one bold enough to hint at indentured servitude???

Comparison to slavery

Like slaves, [indentured] servants could not marry without the permission of their owner, were subject to physical punishment (like many young ordinary servants), and saw their obligation to labor enforced by the courts. To ensure uninterrupted work by the female servants, the law lengthened the term of their indenture if they became pregnant. But unlike slaves, servants could look forward to a release from bondage. If they survived their period of labor, servants would receive a payment known as "freedom dues" and become free members of society.[19] One could buy and sell indentured servants' contracts, and the right to their labor would change hands, but not the person as a piece of property.

On the other hand, this ideal was not always a reality for indentured servants. Both male and female laborers could be subject to violence, occasionally even resulting in death. Richard Hofstadter notes that as slaves arrived in greater numbers after 1700, white laborers became a "privileged stratum, assigned to lighter work and more skilled tasks."[20]See also: Black Codes in the USA

Have the Portuguese been Hoodwinked! Bamboozled! Run Amok? Led Astray?

And as excerpted from Portugal Is On The Verge Of Tapping Out, UFC Style – You Knew It Was Coming, Here’s The Analysis! Thursday, March 31st, 2011, you can clearly see why the Portuguese banks can not longer swallow any more sovereign bonds. Keep in mind that they were most likely being forced to (like most European banks) to eat this bonds in order to create a market for them and to gain access to central bank funding. You can only eat but so much toxin before you keel over, though!

Speaking of loading up on Portuguese bonds, these Bloomberg screen shots provided by Zerohedge tell the story in an instant:

Same thing for Ireland:

And below are the three horsemen of the Eurocalypse. Ironically the bond market is offering a far higher yield for ultra short-term Portuguese than Irish.

To put these charts in perspective, let's dig up the post I made exactly one year ago in April titled, "How Greece Killed Its Own Banks!":

Well, the answer is.... Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)...


The same hypothetical leveraged positions expressed as a percentage gain or loss...


When I first started writing this post this morning, the only other bond markets getting hit were Portugal's. After the aforementioned downgraded, I would assume we can expect significantly more activity. As you can, those holding these bonds on a leveraged basis (basically any bank that holds the bonds) has gotten literally toasted. We have discovered several entities that are flushed with sovereign debt and I am turning significantly more bearish against them. Subscribers, please reference the following:

Continue reading Portugal Is On The Verge Of Tapping Out, UFC Style – You Knew It Was Coming, Here’s The Analysis! Thursday, March 31st, 2011 to discover our all in haircut analysis for Portuguese bond investors. See my latest Eurozone analysis and opinion, or the earlier and be sure to read up on our full Pan European Sovereign Debt Crisis analysis, which is freely available to everyone. If you like what you see subscribe to my deep research services or you can follow me freely on on Twitter!

Last modified on Wednesday, 06 July 2011 07:38

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