Portugal gets downgraded and Greece issues some Treasury Bills

I am pleased that I said yesterday that summer lulls in equity markets can be misleading and quickly reversed. The good figures from Alcoa (followed later by Intel the chip manufacturer) gave us triple-digit gains for equity indices around the world. The FTSE 100 was up 104 the Dow Jones industrial average rose 146 points and the Japanese Nikkei index followed on by rising some 258 points. As is the way on such days matters which on other days might have an impact were ignored for example the Chinese stock market having fallen 2% or Portugal being downgraded by Moodys. Although to be fair the Moodys announcement of which more later was probably accompanied by the cry “Mafeking has been relieved” which as this town was relieved in the Boer war over 100 years ago… As to yesterdays inflation figures I feel that they are hinting that inflation may prove to be quite sticky through the rest of this year which of course may well carry us to the VAT (and hence) inflation increase in January 2011. As I do not expect them to raise rates ( and am beginning to wonder if the window for so doing might be passing) it will be a difficult period for the Bank of England.

Moodys downgrade of Portugal’s credit rating

Yesterday Moody’s cut Portugal’s sovereign debt by two notches from AA2 to A1. Apologies to those who find the letters and numbers the ratings agencies use confusing, opaque and inconsistent amongst themselves, I am afraid it is another of their failings. In truth the move is probably more due to the fact that Moodys have a new sovereign debt team than any great change in Portugal’s circumstances. This move could and should have been made a couple of months or more ago hence the “Mafeking has been relieved” comment. However their reports are often interesting.

The Portuguese government’s debt-to-GDP and debt-to-revenues ratios have risen rapidly over the past two years…..with the debt-to-GDP and debt-to-revenues ratios eventually approaching 90% and 210%, respectively, before stabilizing once the budget has moved back into a primary surplus position

Moody’s also remains concerned about the economy’s medium-term growth potential

Actually that is not too bad a summary and the real problem is the last sentence I quote. I have written articles on Portugal assessing her economy ( 24th June,14th May,5th May amongst others) and one of the issues was that she has grown very slowly since ( and to an extent before) she joined the euro zone. She in effect has had her own lost decade of low growth in the 2000s when most other countries were having booms and expanding. Portuguese economic growth crawled along at 1% a year. Now project that forward into the post credit crunch era and it is hard to predict that she will grow at any great speed. This is in spite of the fact that she outperformed in the first quarter of 2010. On top of these issues comes the uncertain size but clear direction of the impact of her austerity package on economic growth.

So if she grows slowly again it is hard to see a way out of her debt problems as slow economic growth has clear implications for government revenues and spending. Whilst she is trying some structural  reforms in her economy it will be some time before we see any real effect. Being in some respects an economic Siamese twin with her neighbour Spain who has her own problems does not help. I have pointed out before the increasing reliance of her banks on funding from the European Central Bank as it rose from 18.5 billion Euros to 36.6 billion between April and May as interbank markets refused to trade with what they perceived to be weaker banks.

What effect does this have?

In some ways Moodys is just playing catch-up and if anything still gives Portugal too high a rating. If we look at her ten-year government bond yields then they closed last night at 5.69% which was up 0.26% on the previous close. At the shorter-end her two-year government bond yield rose from 3.09% to 3.27%. Rather curiously some news sources are reporting that there was little impact which is not quite the story of the numbers above. Personally rather than the downgrade itself my opinion is that the downgrade probably focused investors minds on Portugal’s problems, as with all due respect to any Portuguese readers it is a small  (but pleasant) country which is unlikely to be at the forefront of world investors minds every day.

Greece issues some Treasury Bills: success or not?

Yesterday must have been a day of some trepidation at the Greece public debt management agency. After rather embarrassingly having cancelled an auction of 12 month Treasury Bills the day before, the agency may well have been in some disarray. However in the event they achieved a partial success in my view. The successful part was that she raised more than expected raising 1.62 billion Euros rather than 1.25 billion and that whilst most buyers were domestic ones there were some foreign buyers. She also paid interest at 4.65% which is less than the 5% she can get funds from the euro zone rescue fund. This is not a lot over the 4.55% she paid back in April when her ten-year government bond yield was more like 6 1/2% than the current 10.4%.

However these bills only last 6 months so this is only a rather temporary fix. Also if you look at 4.65% then for example if you ignore the undated gilt sector then there is not a UK government bond of any duration which has a redemption yield of anywhere near 4.65%. Our latest Treasury Bill auction was at a rate of 0.4942% on the 9th July. If you cast your eyes up the page to Portugal which has her own problems then she even at two-years duration her government is only paying 3.27%. So it is only a partial success.

Whether the European Central Bank’s Securities Market Programme implicitly backed this issue we may never find out due to its secrecy. But even if it did not then these assets could be deposited at the ECB in return for a loan at 1%. You would not get the full amount in return as the ECB imposes a haircut but 4.65% on say 90% is a lot higher than 1%. If you are a Greek bank who would collapse anyway if Greece defaults on her debt you may as well take up as much as you can. At this point the success begins to look rather more partial.

Thank you to those that replied on the subject of Greece’s finances yesterday. I will return to this subject as I have the feeling that there is a danger of being misled by short-term expenditure cuts. Also many news services seem unclear as to why the plan to sell 12 month Treasury Bills was abandoned. It really is quite simple,they yield just under 7% and Greece can borrow from Europe at around 5%, which would you do? Put another way the plan to issue these bills was somewhat ill-considered in the first place.

The ECB and its Securities Market Programme

For those unaware of this programme it is the ECB’s equivalent of Quantitative Easing. It is packaged in a more complicated fashion as rather inconveniently European Treaties actually forbid this sort of thing so a fudge is required.The excuse is that markets are disturbed and in disequilibrium and so the ECB is helping settle them down. In effect it has been buying peripheral debt which means mostly Greek and also some from Portugal, Ireland and Spain. It has never specified how much it would buy but appears to be winding down its purchases as it announced yesterday that over the last week it only bought 1 billion Euros worth of debt under this programme making a total of 60 billion Euros. In addition Mr Trichet the President has heavily hinted that the programme is ending.

Personally I feel that if you go back to early May when on a Thursday Mr.Trichet stated that the ECB was not even discussing such a policy and yet at 2am on the following Monday the Spanish Finance Minister Elena Salgado announced that such a policy was starting, I suspect that the ECB was forced into this policy and will be happy to abandon it. Some members such as Axel Weber have pretty much stated this publically although others have been more circumspect.

The UK

There have been a couple of interesting developments over the past couple of days. We to have been affected by ratings agencies. You may be pleased to hear that Standard and Poors has reaffirmed our AAA status although we remain on negative watch. However they did say something interesting about the Office for Budget Responsibility.

Our economic growth assumptions are lower than those of the new Office for Budget Responsibility (OBR), in large part because we think private sector deleveraging will depress demand to a greater extent than assumed by the OBR

So, while we agree with the OBR that a rebalancing of the economy will occur over the next five years with net exports contributing positively to growth (thanks to a 24% real effective depreciation in the exchange rate since 2007), we think the process will likely proceed more slowly.

I would imagine George Osbourne and Alan Budd received that with an ouch…

Meanwhile in the orient something has stirred on the issue of ratings. China has revealed the ratings from her Dagong Global Credit Rating Company. Here we in the UK have been downgraded to AA- and we are not alone as many other western countries have been downgraded too including more surprising candidates such as Germany and Canada as well as more obvious candidates. The criteria are that they and we are ” heavily burdened with increasing debt”. Be that as it may this agency has somehow found a way of raising the credit rating of its own (totalitarian) government from a variety of single A statuses to AA+.

I am now going to look at todays unemployment figures which sound good on a headline basis with registered unemployment falling by 20,800 but we have had other themes such as falling employment and  a rising category of economically inactive to consider in recent figures.

Update 11:30 am

Portugal has auctioned some government bonds this morning and it has gone reasonably successfully. She auctioned a 2012 stock at an average yield of 3.159% and some more of her June 2019 4.75% at a yield of 5.304% and in total some 1.68 billion Euros were issued. It is hard to compare with previous issues as the last tranche of the 2019 bond was auctioned just under a year ago at an average yield of 4.129% and much has changed in the world since then.

The cloud in the silver lining is that at 5.304% for the 2019 bond it would have been slightly cheaper to have borrowed the money from the European Financial Stability Facility(EFSF) which conveniently has just declared itself open for business. Perhaps not that open…


9 thoughts on “Portugal gets downgraded and Greece issues some Treasury Bills

  1. Thanks.
    Portugal / Club Med and Ireland : I listened coincidentally to Dietmar Hornung of Moodys giving a speech in Ireland. He mentioned some important issues : the ratios of interest payments to revenues is being scrutinised closely ; liquidity as well as solvency is in the ratings’ cross-hairs; other demographic timebombs and climate change could compress freedom of action. Against him was Ann Pettifor who argued that investment,spending and growth was the only answer, not coordinated austerity and that all this push for fiscal consolidation was importantly targeted at avoiding haircuts for financial players on sovereign debt. Ireland is worrying me with UK headquatered banks very exposed to borrowers there.

    • Is it just me or does anybody else find that the analysis done by credit ratings agencies, for corporations and for sovereigns, seems to be both incomplete and uninspired? Not that there is anything wrong with what they *do* consider (e.g. interest coverage ratios, liquidity etc), it just seems to me that they almost seem to be wearing (wilful?) blinders when it comes to considering anything other than currently observed facts. For example if I am analyzing an investment it is not only important to me that in the ordinary expected course of events the cashflows will be XYZ and therefore adequate, but it also seems germane to consider the sensitivities of the future outcomes as a result of small medium or large changes in the underlying assumptions. Or as my broker once told me recounting the tale of a particular dividend-paying stock that he and others were analyzing and trying to decide whether or not they ought to recommend to their income-seeking clients, sometimes you need to step back from the detailed question of “is the dividend safe” and take a larger view and ask “might the company actually go bankrupt?”

      You know, security analysis as if you were actually thinking of owning the thing?

      Rant off.

      Now not to belittle a billion and I will freely admit an unfamiliarity with the markets involved, but does it not seem that the sizes of these deals that are actually getting done are quite tiny (“only a billion or two”) compared to the size of the outstanding debt and the economies involved? Are these real live fundraising auctions or are they just beauty contests at the margins?

      • DanielC asks:
        “Now not to belittle a billion and I will freely admit an unfamiliarity with the markets involved, but does it not seem that the sizes of these deals that are actually getting done are quite tiny (“only a billion or two”) compared to the size of the outstanding debt and the economies involved?”

        To give a perspective for Greece at least, 2 billion euros is 0.8% of GDP — the Greek press (today’s Kathimerini) is just running these numbers as they are discussing the debts of public companies. The companies running public transportation (trains, metro, buses, trolleys) have accumulated debts of 12-13 billion euros, which are supposed to be added to the national debt sooner or later — this year’s deficit is estimated at 2 billion euros. They have difficulty borrowing from banks to meet their operational costs and make payroll. There was a strike a few weeks ago by public bus drivers who were not going to be paid, then the government lent the money, the company made payroll, the buses began running.

        Meanwhile, as today’s Eleftherotypia reports (and has been in the news for a while), there are 19,000 public servants who have retired and are waiting for their lump sum payment (part of the retirement package). The average waiting period for these people has been 20 months, and the total cost for the payments is 850 million euros. You get the political picture.

        So, yes, 1-2 billions is actually quite a bit, and of course it adds up.


      • Hi js,

        you paint a very bleak picture of the Greek economy. Sounds very much like a country on the edge of a cliff & not at all what the mainstream press would have us believe in the rest of Europe.

        Thankyou very much for your insight.


      • Hi DanielC,

        I share your concern that the analysis done by the rating agencies is hopelessly inadequate and invalid in its timing. When I was at Business School I well remember one Finance lecturer pointing out to us that the problem with accountants was that they only concerned themselves with historic data; it was like, he said, driving a car an looking out of the rear window! The major ratings agencies are a bit like that; they pronounce on issues and problems almost after they have already occurred. It is no wonder that we all lose confidence in them? Look at what occurred with the derivatives issues leading to the so called Credit Crunch. The ratings agencies did not react until after the event!

        However, this failing is not much different to my mind to the general issue of inaccurate and deliberately deceiving statistics now issued routinely by Western governments. Politics and pseudo-economic manipulation is what almost everything is now about. All is smoke and mirrors designed to fool and deceive.

        This is probably why China’s own new rating agency, Dagong Global Credit Rating Co, has pronounced that Moody’s, Fitch and S&P are too biased towards the West. (That seems to be a euphemism for nonchalant, corrupt and inaccurate.) This new rating agency has announced a new way of looking at the creditworthiness of the world’s governments. In it, the US has been taken down a notch. So have Britain, France and most other western nations.

        The Dagong Global Credit Rating Co used its first foray into sovereign debt to paint a new picture of creditworthiness around the world, giving much greater weight to ‘wealth creating capacity’ and foreign reserves than Fitch, Standard & Poor’s, or Moody’s. Is this just a different view, or is it an attempt to more accurately represent the economic truth, in that ultimately what economics is really about is real wealth – not finance and money?

  2. Hi Shaun,
    I really encourage you to investigate the Greek situation again, as things appear to be quite worse than few months ago. First of all the whole of the parliamentary political parties and large groups of individuals within the Greek society have proven big time that they are unwilling and hostile to making even the slightest degree of change, unless if imposed to them by the ‘scapegoats’ of E.U. and IMF. Few weeks ago i read a detailed review of Greece’s deficit situation on ‘Kathimerini’. It appeared, at that time, that deficit seemed to have decreased (only on paper) by approximately 5 Billion, yet the unpaid obligations by the Greek state in 2010 had accumulated to more than 10 Billion! So in real life the positive impact of the measures claimed by international and local media is an absolute nonsense! The impact of the crisis so far on private sector is tremendous. Did you know that basic food categories such as milk are decreasing in super market turnover by almost double digit figures? Or that there is a huge problem of liquidity in the market, now starting to impact on big businesses as well after having ‘rocked’ for the last couple of years the small and medium enterpreneurship? In the last week we have had a major multinational that decided to abandon the Greek market (FNAC) and a big local supermarket chain (4000 employees) that went bankrupt. More are ready to follow soon. We are now in a stage where the public sector faces with primitive functional problems (hospitals witout machinery,schools without teachers) and the private sector is strangled by a lack of money liquidity and declining consumer power. At the moment i cant see how this situation can be reversed. I am expecting that by the time GDP figures for Q4 are going to be published, insolvency is going to be the word among all economic circles.

    • Hi Angelos and welcome
      Thanks for the insight. I would love a link to the Kathimerini article. As to my own views of the sudden improvement in Greece ‘s finances I can only be sceptical. After all, if the improvements for January to May 2010 were genuine there was no great need for an austerity programme was there? Or indeed a rescue package…

      On another tack even if I was not already curious and sceptical I notice that Mr Juncker who is Eurogroup Chairman has said “The Greek government program… is impressive and has outpaced our expectations “, during the financial crisis I have learnt that his public statements are usually a reverse indicator….

  3. Good morning Shaun,

    Thanks for the reply, i am actually reading your blog every single day despite sending a post yesterday for the 1st ever time!
    So here i have couple of links from Kathimerini for you, however they are obviously in Greek so i will make a brief summary:

    This is a link from 10-6 where the 10 Billion that the Greek state owes so far in 2010 are broken down by category. So we have: 6B to hospital suppliers, 1,6 to construction companies, 1 for VAT returns, 0,1 to Media all around the world (!!) and the rest for companies such as financing of investment programmes etc etc. Other sources at that period claimed the figure to be even higher, probably 11 or 12 Billion.

    Again Kathimerini on 12-7 quotes the figures announced by the state (and applauded all around Europe) where the deficit reduction progress (!!) is claimed to be so amazing that it has already been reduced from 17,8 Billion to 9,6 compared to Semester 1 2009.
    So deficit is down by 8 Billion but the state owes 10-12 Billion which it should have paid in the first 6 months of 2010. I can imagine that it wont be that long until Greece announces deficit % of less than 10% compared to 13,6 last year, while everyone with a basic comprehnesion of maths will know that the real figure can probably be as high as 15%

  4. Ultimately the people will make the decisions the politicians, Eurocrats and the financiers are unwilling to make. The problem is that the longer they cling on to the forlorn hope of EMU stability the more extreme the ‘solution’ will be politically.

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