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Thread: Portugal Suffering Greek Contagion Pressures EU Bonds

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    Portugal Suffering Greek Contagion Pressures EU Bonds

    Aside from the well-publicized episode of Greece's ongoing debt crisis, Bloomberg.com reported the following concerning Portugal:

    With a higher debt burden and a slower 10-year growth rate than Greece, Western Europeís poorest country is being punished by investors as the sovereign debt crisis spreads. The risk premium on Portuguese bonds rose to more than double the past yearís average this month. Portugalís credit default swaps show investors rank its debt as the worldís eighth-riskiest, worse than for Lebanon and Guatemala...

    While Portugalís public debt of 77 percent of gross domestic product is on a par with that of France, the burden including corporate and household debt exceeds that of Greece and Italy, at 236 percent of GDP. The savings rate is the fourth-lowest among 27 members of the Organization of Economic Cooperation and Development, according to the Paris-based groupís data.
    Portugal Suffering Greek Contagion Pressures EU Bonds (Update1) - Bloomberg.com

    One of the key dynamics in play is confidence. Portugal is currently experiencing rising risk premiums on account of diminishing confidence. Down the road, if the U.S. fails to develop and implement a credible fiscal consolidation program (discretionary spending reductions, mandatory spending/health-reform, modest tax hikes), the U.S. could see confidence begin to deteriorate in its fiscal sustainability.

    To put things into perspective, the U.S., the broadest measure of U.S. debt (domestic non-financial debt) amounted to 240% of GDP in 2009 Q4. Despite deleveraging from the severe recession, household debt remains at an elevated 94% of GDP. The federal debt is projected to rise rapidly according to CBO to 90% of GDP within a decade. Barring fiscal consolidation, and also improved household saving, it would not be out of the question for the U.S. to begin to experience symptoms of growing concern about its fiscal situation (relatively higher long-term yields, possible failed debt offering on one or more Treasury auctions, emerging demands that it price Treasuries in foreign currency to avoid partial default via inflation, etc.) some time over the next 5-10 years. At the same time, its being placed on negative outlook by the major ratings agencies even sooner is probably more likely than not, as in the short-run ideological considerations (Democratic positions on entitlement spending/Republicans also now treat Medicare as untouchable; Republican positions on taxes) appear greater than commitment to difficult pragmatic fiscal consolidation choices.

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    This has more to do with speculators and anti-Euro people than anything else.
    PeteEU

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by PeteEU View Post
    This has more to do with speculators and anti-Euro people than anything else.
    Pete,

    I agree that there is a speculative element to the situation. Unfortunately, when fundamentals are weak, commitment to addressing structural problems is ambiguous, and confidence is low, an environment is attractive for speculative moves that can exacerbate the situation.

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    "down the road" is now, here, suddenly upon us

    ny times story, november: debt service, mere interest alone, will approach one trillion per year by about 2016

    News Headlines

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by The Prof View Post
    "down the road" is now, here, suddenly upon us

    ny times story, november: debt service, mere interest alone, will approach one trillion per year by about 2016

    News Headlines
    Right now, confidence in U.S. fiscal sustainability has not dissipated. The U.S. does not face an imminent debt crisis.

    Perhaps in 2011 or 2012, the U.S. will be put on negative outlook if it does not have a credible fiscal consolidation strategy. Afterward, failure to adopt such a program could lead growing symptoms of a gradually rising debt crisis e.g., relative increase in long-term rates, etc.

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by donsutherland1 View Post
    Pete,

    I agree that there is a speculative element to the situation. Unfortunately, when fundamentals are weak, commitment to addressing structural problems is ambiguous, and confidence is low, an environment is attractive for speculative moves that can exacerbate the situation.
    Oh I dont disagree one bit. Greece got into this mess themselves and need to get out of it. They have very little credibility on top of that.

    But what pisses me off is speculators that are allowed basically bring down whole nations and the lives of millions of people for profit, and often on the basis of not even owning the methods of what they are using to bring down said countries. They in fact "borrow" it from others in many cases, and hope to make a quickish buck on it. This kind of speculation must be stopped.. to speculate you need to own whatever you are speculating in. If you are speculating in oil, then you physically need to buy the oil and stockpile it. And that is my point.

    In Portugal's situation, it is very clear that it is the speculators that have pushed up the yield. Same was it for Spain earlier this year, and last year it was the 150 dollar oil. The fundamentals of the Portuguese economy has not changed that dramatically over the last 5 years. Sure they are in a budget deficit but so is most of the planet. Their debt is about the average of the EU and western world and their unemployment is not massively high. They have a lot of structural problems, but so do Italy, Spain, France, Germany, UK and US on different areas, and these problems have been around for decades.

    In the end it is just another attack on the idea of the Euro and Eurozone by people outside the economic union it self. It is always ironic that the biggest anti Euro personalities are people from the US and UK who have nothing to do with the Euro but see it as some kind of threat to their supposed dominance of the world economic market. This has been going on since day 1 of the Euro and with the crisis these people have seen and opening to attack the Eurozone to weaken it.

    In the end we must ask ourselves, should we allow "someone" to speculate with the lives of millions of people for profit. I say no and hope to god the Eurozone gets a pair of balls and start going after these pathetic excuses for human beings.
    PeteEU

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by donsutherland1 View Post
    The U.S. does not face an imminent debt crisis
    a trillion a year is a crisis

    2016 is imminent

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by donsutherland1 View Post
    Right now, confidence in U.S. fiscal sustainability has not dissipated. The U.S. does not face an imminent debt crisis.

    Perhaps in 2011 or 2012, the U.S. will be put on negative outlook if it does not have a credible fiscal consolidation strategy. Afterward, failure to adopt such a program could lead growing symptoms of a gradually rising debt crisis e.g., relative increase in long-term rates, etc.
    Thats because the financial markets are ignoring the obvious and are hoping for the good old days where the US was the engine of growth based on its consumer power. Those days are gone but they cant admit it.

    The amount of debt in government on all levels in the US dwarfs any problems in Europe but it seems not to matter for now. Add to that the massive amount of personal debt in the US (non secured aka credit cards and so on) and you have a ticking time bomb of gigantic proportions that no one wants to discuss at all in fear of it might go off.
    PeteEU

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by PeteEU View Post
    Thats because the financial markets are ignoring the obvious and are hoping for the good old days where the US was the engine of growth based on its consumer power. Those days are gone but they cant admit it.

    The amount of debt in government on all levels in the US dwarfs any problems in Europe but it seems not to matter for now. Add to that the massive amount of personal debt in the US (non secured aka credit cards and so on) and you have a ticking time bomb of gigantic proportions that no one wants to discuss at all in fear of it might go off.
    Ratings agencies are typically behind the curve when it comes to risk. There is a bias toward continuity. Hence, as the actual risk profile of an entity (state or firm) deteriorates, the gap between the actual risk and the risk implied by the ratings agencies grows. Unfortuntely, in behavioral studies, there is a pronounced human bias toward the status quo. Hence, when risk situations change, there is an invariable need to catch up. IMO, financial conservatism (erring on the side of assuming too much risk) would be better than maintaining a bias toward continuity.

    In that context, I believe Greece should have had its debt rating at junk status months ago. The combination of annual budget deficits > 8% of GDP, gross public debt > 120% of GDP/net government debt > 100% of GDP, a current account deficit of nearly 10% of GDP suggested a country at high risk of default consistent with numerous past sovereign debt crises. To date, even as the Greek government has tried to cast itself as taking 'heroic measures' to deal with its debt situation, it appears that its steps are rather timid and more will be expected by the IMF.

    With respect to the U.S., I believe the U.S. should already be on negative outlook (something I think probably won't happen until 2011 or 2012). The U.S. has no credible fiscal consolidation plan. The two political parties appear unwilling at present to consider the difficult choices necessary for such a plan. Domestic non-financial debt, gross public debt, net public debt are all rising. The current account deficit has ticked up in the recent quarter and is expected to rise further, though it remains well below the excessive current account imbalances for Greece and Portugal.

    Having said all that, I do believe the IMF, EU, and U.S. should collaborate on designing mechanisms that reduce the damage that could be inflicted by speculative attacks, though I don't see how speculation could be prevented altogether. There are too many financial instruments that could be combined to create synthetic instruments that would serve the speculative interests. Imposing capital requirements for naked positions could offer one potential circuit-breaker so to speak and such requirements could also serve a risk mitigation function, too.

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    hrmph

    trouble is, it's too late

    and now, when athens does try to act, the left gets all angry in the agora

    Violent protests hit Greece as German backing sought

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