An Irish policeman confronts protesters as they break through the front gates of the Irish Prime Ministers office in Dublin on Monday, Nov. 22.PETER MUHLY
In the end, the dead tiger didn't bounce, rather it twitched. Instead of sparking off a relief rally in the euro zone bond markets, the Irish €90-billion EU/IMF rescue package triggered alarm bells -- and the risk premium that a bondholder pays for insuring Irish, Greek, Portuguese and Spanish bonds climbed on Monday. The yields on these bonds continued to rise on Tuesday, exacerbating the febrile market mood.
There must now be little doubt that Portugal too will require assistance from the European Financial Stability Facility and the appalling prospect that lies before us is that the bond vigilantes might then attack Spain. At that point, all bets must be off for the future of the euro zone because the German taxpayer cannot be expected to underwrite the financial future of every European state south of the Alps and Ireland as well.
It makes no difference that all this is horribly unfair. The Irish government didn't borrow recklessly, it was the banks that led the country to ruin, pandering to people with absurdly cheap loans. Portugal didn't binge on real estate and the Portuguese government took early steps to rein in spending, but Portugal is going backwards rather than forwards. It is not making convincing progress in cutting its deficit and the Portuguese economy is slowing down.
In this market, all bad news is punished and the Portuguese trade unions will fan the flames with a strike on Wednesday against austerity measures to be voted in the Portuguese parliament on Friday. Meanwhile, in Spain, concerns are mounting about the refinancing of Spanish banks. Spain's regional lenders got into difficulty at the time of the Greek bailout earlier this year when interbank lending dried up. More than €50-billion in government and bank loans will mature and require refinancing in March and April next year and the question is whether Spain's debt markets can cope at a time when volumes in the repo banking markets are dwindling.
This is the problem, a rolling tide of debt maturities extending into the future. Each wave is bigger than the last and the EU's ability to surf this breaker is looking doubtful. Consider Greece. According to Evolution Securities, a London brokerage, Greece needs to repay €28-billion EU/IMF rescue package loans in 2014. By 2013, that support package ends and in theory Greece needs to borrow in the public debt markets, not only to repay the EU and the IMF but its own portfolio of maturing debt.
However, thanks to the new German-inspired permanent crisis resolution mechanism, any new bond issued by Greece will contain a clause about debt restructuring implying bondholders will take a haircut in the event of default.
According to Evolution, Greek bonds maturing in 2014 trade at below 80 per cent of face value at yields of almost 12 per cent. These extraordinary interest rates are priced in at a time when Greece is not asking the market for funds. Gary Jenkins, Evolutions head of fixed income research asks the rehetorical question: "Who will lend to Greece €28-billion in 2014 on subordinated terms?"
And who will lend to Ireland when its rescue loan matures? And who would lend to Portugal, to Spain and so on. We can see where this is going. What we don't know is precisely whent the wave breaks and the surfers crash.
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