The European crisis isn’t dead, it’s on hiatus.
The LTRO has dramatically improved the fortunes of Italy and Spain but disaster still looms in Portugal.
We’re all tired of the Greek saga and don’t want to re0watch the same play with different actors at the moment. But it’s not going to go away. European leaders need to grasp the opportunity they have at the moment while markets are calm. With another reasonably sized bailout they can snuff out the problem in Portugal; instead, they’re wishfully hoping it goes away on its own.
The ECB’s Carlos Costa, who also heads the Bank of Portugal, today said it’s “not desirable” to revisit the topic of Portugal’s financing gap and that a second rescue is “undesirable”.
It’s a familiar story. For every sovereign default, there has been a government that has played wait-and-see, that has said “Maybe the economy will pick up and bond yields will come down on their own.” It never happens. If you don’t “desire” to deal with it sooner, you always pay more later.
There is no sense in breaking down the Portuguese debt/revenue/repayment situation. It is what the bond market says it is – unsustainable. Aside from Greece, Portuguese CDS are the highest in the world, topping Pakistan, Argentina, Ukraine and Venezuela.
Not a cent of the trillion euros of cheap LTRO money has gone into Portuguese bonds. Since November, Italian yields have improved dramatically while Portuguese yields have demonstrably worsened.
The market even has a good idea when the port will hit the fan. Bonds maturing in February 2013 yield 4.8% (more than double Italy and Spain but roughly equal to Ireland). Seven months later, they jump to 13.1% compared to 5% in Ireland and around 2% in Italy and Spain.
It’s politically tough to deal with Portugal at the moment and it risks upsetting other periphery bond markets but it’s times like these when leadership matters. Unless European leaders start talking at different tune, this is yet another reason to sell euros.
