Problems in Europe Flaring up Again? Portuguese CDS Spreads Blowing out….

By Walter Kurtz, Sober Look

The date is set for the troika inspectors to pay a visit to Portugal.

CBS News: – Portugal’s Finance Ministry says inspectors from the country’s bailout creditors will arrive Sept. 16 to assess Portugal’s progress on repairing its public finances and adopting economic reforms.

In return for a 78 billion euros rescue package in 2011, the creditors — the International Monetary Fund, European Central Bank and other euro countries — demanded spending cuts to reduce debt. They also required measures to modernize the economy. Disbursement of bailout funds depends on Portugal’s compliance.

Of course these compliance targets have been loosened considerably since the original agreement. Based on the new hurdle level, Portugal should be able to pass the “inspection” this time around. Given the trajectory of the fiscal balance however, the second half of the year is less certain.

POrtugal fiscal situation

But even if the nation is able to meet its targets, there is no way it can return to the private markets in the near future in order to fund its government. And that’s assuming the political infighting doesn’t preclude them from running into trouble with troika in the near future (see overview).

The Economist: – Even if the recovery gathers momentum and the two governing parties manage to avoid further splits, few believe Portugal will be able to last the course without more outside help. The main question is whether this will take the form of a precautionary credit line, which the authorities could draw on as necessary, or another bail-out with further tough conditions attached. As long as the government delivers promised reforms, other euro-zone governments will probably continue to support it, possibly providing some form of debt relief without calling for write-downs by private-sector investors.

With financing sustainability in question, investors are becoming nervous once again. CDS spreads widened to the levels we saw during the constitutional crisis (see post). It is not just the absolute level of CDS spreads that signals uncertainty. The spread to other peripheral nations, such as Italy and Spain, is now particularly wide.

Portugal CDS


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Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  1. The chart “general government balance” by Credit Suisse shows a “millions of EUR” scale. Should be billions, I assume?

  2. Investors are losing faith in Portugal and that is showing up in wider CDS spreads. Also very little faith in Greece. But sovereign bond investors are still showing strong support for Spain and Italy, so they do not choose to be fearful of contagion. At some point down the road, the troika may crack down in some way on Portugal and Greece, but investors as a whole do not see this spreading, as they did in late 2011. Sober Look, what are your thoughts on contagion to the larger EMU nations? It appears that all of the broader EU indicators are showing that all is quiet on the western front (for now).