IFR Editor-at-large Keith Mullin
For a start, I’d figured that peripheral bond yields – and Portuguese bond yields in particular – had ratcheted in to well below crisis levels, and the market seemed stable enough even taking into account the volatility and broad asset price uncertainty created by the Fed tapering story.
Beyond that, I reckoned that since Portugal had regained market access and the finance ministry was signalling as recently as late June that it was putting together an auction calendar ahead of a resumption of bond sales in 2013, the government had taken access to voluntary private debt markets via new-money prints and debt swaps pretty much for granted as a crucial plank of its exit from the €78bn bailout.
The last thing Portugal needed right now was a political crisis to add to the existing economic and social crises.
That was probably a reasonable assumption in late June, as the €3bn 10-year 5.65% benchmark in May had gone smoothly enough and that had followed a €2.5bn five-year tap earlier in the year and a debt swap last year. That was a nice progression. It was all going so well. What could possibly go wrong, I wondered.
So the long-suffering Mrs Mullin and I concentrated our efforts of reflating the Portuguese economy single-handedly through abundant intake of port, local beers, wines, liqueurs and cocktails, wonderful culinary delights and some purposeful shopping (with an uncompromising focus on local products).
We’d arrived in Braga on the day before the Feast of St John – a big deal in the north of the country – in wonderful temperatures of close to 40 degrees Centigrade (100 degrees Fahrenheit to some of us …) where religious and folk processions gave way to a massive open-air all-night dance-music binge-fest. I could get used to this, I thought to myself.
Sombre
Outside of the copious festivities, though, the general mood of people was pretty sombre. The government of Pedro Passos Coelho and its commitment to painful austerity is deeply unpopular. “The PM would be torn apart if he were let out and all that would be left of him would be his little furry paws,” was one comment echoing the general tone (the paws a reference to ‘coelho’, which is the Portuguese word for rabbit).
The government’s exhortation for people in Portugal to emigrate to find jobs had enraged the general population as it was seen as a sign of capitulation around economic recovery; this a population already exhausted by the relentless, hard-line and one-dimensional focus on austerity and its impact on employment and living standards; and furious both at the government’s failure to come up with a credible growth agenda and a general sense that banks and bankers had been bailed out at the expense of everyone else.
“Morre, capitalismo, morre (“Die, capitalism, die”), was a slogan I saw on walls around Braga, along with templates of Angela Merkel with Hitler moustache and Nazi salute spray-painted onto walls; another grisly sign of discontent.
As it turned out, the general strike called by the Communist Party-influenced CGTP trades union federation was a flop. The only outward sign of the fact that anything untoward was afoot was the garbage wasn’t collected and public transport ground to a halt. The rallies planned on the day were very sparsely attended. Communist Party vehicles driving around Braga with loudspeakers telling people not to stay at home was a bizarre and somewhat perverse sight.
Mind you, they were right to be concerned. As I’d Tweeted the day after the strike, “My political summary of Portugal’s general strike yesterday? Bars & cafes packed and everyone went to the beach”. In short, I was able to continue my spending campaign with abandon.
Over-reaction
I did my utmost to stay away from the news, but I couldn’t help but notice the Q1 budget deficit data, which had deteriorated to a worrisome 10.6% largely owing to the €700m state capital injection into Banco Internacional do Funchal (Banif) in January. But this had all been pretty well telegraphed so didn’t really cause much upset.
The resignations of finance minister, austerity-Meister and architect of the bailout Vitor Gaspar (an unhappy bunny ever since the constitutional court threw out some of his austerity measures last year and feeling increasingly isolated in government) and subsequently of foreign minister and head of the CDS-PP junior coalition party Paulo Portas (in protest at Gaspar’s replacement without consultation by Maria Luis Albuquerque who is well known to the Troika and a signal that the senior coalition PSD party will maintain its commitment to austerity) were greeted with a shock and horror that I found a little overdone.
After all, relations between the coalition parties have been fractious for some time over the direction of government policy and the junior party’s sense that it is unable to influence policy outcomes. In my view, the 8.2% yield the 10-year bond hit on Wednesday and the curve flattening were as much a sign of illiquidity as a sign of capitulation per se.
You could have driven a coach and horses through the bid-offer spread on Wednesday (bid price here = no bid) and volumes were almost non-existent. The more conciliatory tone late Wednesday and into this morning coming out of the Portas and Passos Coelho camps and assurances that the two remaining CDS-PP ministers would remain in situ for now suggests Wednesday’s stock and bond market rout was not real; the retracement of much of the lost ground the proof…
The temporary ban on shorting shares of Banif, Banco Comercial Portugues, Banco Espirito Santo and Sonae Industria (which were all hammered on Wednesday) may have been a precaution but I’ve always been against trading bans. I can understand why the Portuguese SEC would want to avoid aggressive speculative activity but I don’t think banning shorts ultimately achieves much.
The last thing Portugal needed right now was a political crisis to add to the existing economic and social crises. The opposition Socialist Party and the Community Party are calling for new elections; the CGTP is organising a rally outside the presidential palace this coming July 6 and is demanding the government resigns; people are talking of a new bailout.
The Troika is scheduled to begin its next review of Portugal on July 15. This may now be delayed pending a resolution of this latest bout of political volatility and any government reshuffle that emerges from it. Not sure if I’d want to bet the farm on the outcome of internal PSD/CDS-PP horse-trading followed by government/Troika horse-trading around a potential relaxation of bail-out conditions.
In short, all I wanted was a spot of R&R in the sunshine away from the strains of bailouts, austerity, market volatility, collapsing prices, spiking yields, demonstrations, strikes and protests. And I got this.
Back to work tomorrow… more stressed than when I went away.
