Portugal Reenters Bailout Radar As Traders Realize Greek "Rescue" Model Is Not Feasible Here
- CDS
- Cramdown
- Creditors
- default
- fixed
- Greece
- International Monetary Fund
- Portugal
- Reuters
- Sovereign Debt
Remember when Europe was fixed, if only for a few weeks? Those were the times, too bad they are now officially over. EURUSD is back under 1.30 in thin volume because even as we "shockingly" find that, no, Greece did not have the "upper hand" since Greek bondholder negotiations just broke down (and that over the matter of a cash coupon delta between 3.5% and 4.0%, which implicitly means that from a bondholder IRR perspective, when taking a 15 cent EFSF Bill into consideration, the hedge fund community fully expects the country to be in default even post reorg in at about two years). But it is that "other" European country which was recently junked by S&P (causing the 10 year to soar to new records), that is now the focus point of (re)bailout concerns. Reuters reports: "The euro nudges down some 20 pips to $1.2995 in thin, illiquid trade with Tokyo dealers citing renwed fears Portugal may need a second bailout. Undermining the glow of Lisbon's achievements in reforming the country's labour market is the rapidly rising market concern that it is the next potential candidate to default in the euro zone after Greece -- a point that is fast becoming clear as Athens approaches the end of its debt restructuring talks." And here is the paradox: if Greece succeeds in persuading the ad hoc creditors to accept a 3.5% coupon, which it won't absent cramdown and CDS trigger, Portugal will immediately if not sooner proceed with the same steps. There is however, a problem. Unlike Greece, where the bulk, or over 90%, of the bonds are under Local Law, and thus have no bondholder protections (a fact about to be used by Greece to test the legal skills of asset managers who can retain the smartest lawyers in the world and generate par recoveries on their bonds in due course), in a generic Portuguese Euro Medium Term note Programme prospectus we find the following:
Oops: negative pledge (a simple one at that, not that garbled monstrosity of verbiage that some Greek bonds have) and UK-law. Looks like the Greek Modus Operandi of dealing with its uber-leverage problems will be quite hindered (read impossible) when its comes to Portugal, where a substantial portion of its sovereign debt actually does have significant creditor protections. It also means good luck not only trying to enforce a coercive cram down, but also attempting to layer on a primed piece of debt with liens on top of the EMTNs (i.e. IMF bailout capital), without every asset manager in possession of these bonds suing the country into oblivion at a London court of law.
Finally look for creditors to flock to these bonds at the expense of any other bonds (Interbolsa, older issues) that do not, as we predicted over the weekend.
So much for the Greek deleveraging case study applied to other European countries: think fast Troika.
ACT ONE.....
Italy Police Busts Fitch Milan Office
The USS Europa Discorida story just gets more and more surreal.
- ITALY PROSECUTORS WIDEN RATINGS AGENCY PROBE TO FITCH, UNDER INVESTIGATION FOR MARKET ABUSE, INSIDER TRADING - INVESTIGATIVE SOURCE
- ITALY FINANCE POLICE SEARCHING FITCH OFFICE IN MILAN, ANSA SAYS
S&P maybe? Sure. But piss off the French rating agency? As if anyone even trades in collusion with the completely unmoving announcements by the most irrelevant of the NRSROs? This is just the definition of irrational Italian scapegoating which will do nothing to help Italy-French relations, but at least it will provide "justification" for Fitch's evil downgrade when it comes - after all it was obviously in retaliation for the Italian police just doing its job. Finally, how long would an Egan-Jones office in Milan stand before it was burned to the ground: 1 week? 1 day? 1 hour?
More from Reuters
ACT TWO .....The Italian tax police was in the offices of ratings agency Fitch in Milan on Tuesday to carry out checks ordered by prosecutors investigating rival agencies Standard & Poor's and Moody's, a senior prosecutor told Reuters.
"Men from the financial police are at Fitch in Milan," said Carlo Maria Capristo, chief prosecutor in Trani.
The Trani prosecutors are investigating possible crimes of market manipulation and illicit use of privileged information when Standard & Poor's downgraded Italy earlier this month.As part of the same probe, they are also investigating the impact reports by Standard & Poor's and Moody's on Italy and its banking system had on markets and whether any crimes were committed.
Desperate Spain Wants European Rescue Fund To Be "The Bigger The Better"
No, there is no desperation in Spanish PM's Rajoy statement at all. The head of the economy, whose unemployment rate just soared to a ridiculous 23% in the past quarter, registering the largest drop since the Lehman collapse, pretty much made it clear that without European (read German) fiscal aid viagra, the unemployment rate may soon reach that of Chicago, only without the typo. Reuters reports that Spain favours the creation of the largest possible European financial rescue fund to prevent future crises, Prime Minister Mariano Rajoy said on Tuesday, adding that his government will meet its budget deficit target this year. "We support a rescue mechanism, the bigger the better, for it to act as a dissuading element for certain things that we've been going through lately," Rajoy told reporters after meeting his Portuguese counterpart, Pedro Passos Coelho. He said Spain will meet its budget gap goal of 4.4 percent of GDP this year. Judging by the Spanish (un)employment chart, and specifically recent trends therein, we will take the under. And the over on the Enzyte jokes.
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