Tuesday, February 4, 2014

How long can it be before Emerging Markets turmoil , Japan market turmoil - finds its way to the PIIGS of Europe ? Keep an eye on Portugal , Spain and Italy !

Monday, February 03, 2014 9:22 PM

Portuguese Debt About to Implode? What About Spain?

Is Portugal about ready to implode?

That's what one hedge fund manager believes. For now, interest rate action suggests otherwise.

We will explore the case for implosion but first consider this chart of 10-year sovereign bonds.

Portugal 10-Year Sovereign Debt Yield

One certainly could have made a fortune plowing into 10-year Portuguese bonds. Does that mean Portugal is out of the woods?

I don't think so, and neither does Tortus Capital hedge fund manager David Salanic.

The New York times describes the setup in A Lonely Bet Against Portugal’s Debt, but I am more interested in Tortus Capital's thesis.

Salanic maintains the status quo is not sustainable. Here is his overall thesis.

Portugal Debt Implosion Thesis
  • The Troika Program is off track. Portuguese bondholders are at the mercy of that market.
  • Portugal has excessive public and private debt financed from abroad. Portugal can neither grow nor devalue that debt.
  • Austerity fatigue has set in as the people carry the full burden of the adjustment.
  • Corporates are defaulting en masse and cannot sustain their debt burdens, leading to a vicious cycle of deleveraging.
  • The long-term outlook is bleak.
  • Debt-to-GDP is very high and growing one percent per month. Portugal is the third most leveraged country in the Eurozone.
  • Accounting for growth and interest expense, Portugal's debt is the highest in the Eurozone and is not sustainable.
  • Portugal can neither raise taxes nor cut expenditures, leaving little room to improve debt-servicing capacity.
  • 40 consecutive years of deficit and 18 years without a primary surplus confirm that Portugal cannot sustain so much debt.
  • In the most optimistic case, the Portuguese sovereign has at least 30% too much debt.

Salanic does a fantastic job presenting his case in a 62 page document, Rehabilitating Portugal.

I recommend reading the presentation in entirety, but here are a few charts.

click on any chart for a sharper image 


Missed Deficit Targets

Missed GDP Targets

Wishful Thinking


Debt Financing

Credit Ratings

Inability to Outgrow or Devalue Debt

Corporate Debt Levels

Debt to GDP

Debt to Revenue

Interest Expense vs. Revenue

Target 2 Liabilities 

ECB Liabilities

Mish Comments

That was a lot of charts, but there are another 40 or more in the article. I didn't count.

Other than target 2 imbalances (debt owed to other countries), Spain appeared at least as bad in most of the comparison charts.

Portugal alone is enough to sink the Eurozone given ECB leverage.

I have said repeatedly there is absolutely no way the Eurozone can stay intact and the above analysis strongly supports my claim.

That bond yields are so low in spite of the fundamentals is not an indication things are getting better. Rather, it is a strong sign of a bubble-supportive speculative mentality that central banks have fostered.

I do not know what the catalyst for a breakup will be, or when it happens, but Portugal is clearly back on my radar of things to watch.

Sincere thanks to Tortus Capital fund manager David Salanic for an outstanding report.

Mike "Mish" Shedlock

Spanish Suicides Rise To Eight-Year High

Tyler Durden's picture

Europe has an odd definition of recovery: we already knew that in Greece "recovery" means record high unemployment, an entire generation unable to find work, the return of neo-nazism, no ink with which to print tax forms, and even instances where people infect themselves with HIV to get medical benefits. That, and of course, soaring suicides. Now it is Spain's turn.
While the Iberian nation is furiously scrambling to catch up to Greece in terms of sheer economic collapse, even if the government has changed the definition of GDP so many times, somehow Spain dares to look people in the eye and claim its GDP is growing with 26% total, and 54% youth unemployment, one statistic Spain can't change is that the suicide rate has soared and is now the highest in eight years.
The Local reports, using figures from Spain's National Institute of Statistics that in the most recent data from 2012, released on Friday, 402,950 people died in Spain, some 15,039 (3.9 percent) more than in 2011. Of these deaths, there were 3539 suicides (2,724 men and 815 women), up 11.3 percent from the year before, a rate of 7.6  per 100,000 inhabitants. The figures were the highest since 2005.
According to official broadcaster RTVE, suicide was second only to cancer (15 percent of deaths) in the overall 25-34 age group, but the leading cause of death in young men (17.8 percent). Fatalities as a result of traffic accidents fell by 9.5 percent, to 1,915 - that's probably because so few young men and women can afford to buy a car. Or gas. Or both.
Finally in tangential news, a 21 percent spike in the death rate in February and March compared with the previous year was attributed to a late-breaking flu epidemic. The same period saw deaths as a result of respiratory failure rise 53.6 percent year-on-year.
So the next time you hear about the PIIGS much trumpeted "recovery" (which now is finished even before it started courtesy of the sharp relapse of the global economy courtesy of EMs, and in the case of Greece, quite literally based on the latest growth forecasts), think: