Chillin' out till it needs to be funded
Even as Athens and Brussels look hopelessly middlesd up in the middle of the 17th summit in two years, the markets shot up Portugese 10 Y yield to 17% and beyond with CDS spreads getting beyond five times the ordinary defaulted 700 bps threshold.
At such high rates the collateral already paid in margins would be the payment in case a default is announced even as in Greece’s case CDS worth only $2 bln remains unpaid on total CDS issued at the 90% rate. The default in the case of Greece will now likely be declared at the new deal being worked out with coupons below 4% as the low NPV of substitution leeps participation rate low even as investors present a 3.75% rate and Greek fgovernment last heard stepping up from below 3.5% to even 6% for optimistic recovery conditions later. The Greek deal would stil end with Greek debt at 120% of GDP in 4 years in case Greece starts growing and EUR 60 bln in PSE divestments are completed in the 5 years Only EUR 100 bln of the EUR 200 bln Private held debt of the total EUR 400 bln Greek debt is in control of negotiators thru the IIF Another EUR 150 bln in the hands of ECB will not be treated to a haircut yet.
The Portugal CDS rate has crept up to 3950 bps in the meantime or 39.5% requiring EUR 4 billion in Collateral to insure EUR 10 bln in debt that much paid into margin by CDS writers already thus covering defaults for protection buyers Portugese bonds have also responded to the recovery in bonds since the downgrade but traded at above 14% for the 10 year yields
5 year bond comparisons how markets expecting the Greek situation to be replicated in Portugal perhaps unreasonably, but the end result is that of a run having been declared on assets a nd a breakaway run currently in progress even as January auctions wwent off relatively well as the Portugese Fnance minister barely mentioned he would like to be prepared for more bailouts as he could not manage with existing budgetary plans. The 2 yr bonds followed in the wake of the 5 year bond drops as yields rose to a teetering level.
This time the 2 year bonds have been held in place as Spanish and Italian banks and Priamry dealers use LTRO funds for auctions. Yet, LTRO tranches are going to be used to repay bank debt in February a nd are not likely to last further crashing liquidity and bringing the November squeeze back
Interest int he Dolalr is back though temporarily as commentators are likely to extoll virtues of Asian currencies than either the Dollar and the Euro, keeping the Euro safely above the 1.19 resistance even as Portugal and Greece and then Spain, Italy and Ireland get ready with a leaky fiscal consolidation
Meanwhile ECB has reduced Bond buying concentrating on Portugese bonds bu t staying away as it awaits allocation of firepower between the ESM, EFSF and its 3 yea LTRO