Euro Update(18): Portugal in the dangerous month ahead

I mentioned that the Portuguese  Finance Minister wasn’t very happy with the result of the meeting of Eurozone finance ministers that took place on Monday. I’m putting my money on the fact that the vote of no confidence scheduled for March 10, the recessive  growth numbers for 2010, the poor result of the last debt auction and the fact that a potentially disastrous auction will take place in early March (if past experience is any indication, sometime between the 2nd and 9th of March) are behind his concerns. It’s tricky to know whether he should be concerned about all those issues. But if I was him, I would. The reason is that I believe we are gearing up for that perfect storm I mentioned:

It now seems that the no confidence vote will probably be to no avail, as the main opposition party will probably follow it’s partner to right and abstain, arguing that the Left Bloc, who proposed the motion, mishandled it and equated it with a vote against the right. On the other hand the vote is most likely scheduled for after the next debt auction, and after the inauguration of the president. That means that whatever position they may take now might be changed as a function of the result of that auction. Moreover, even if party lines remain coherent, it is possible, albeit unlikely, that the president dismisses the government and calls for an early parliamentary election.
I believe all of this will depend on how the markets price this no confidence vote and whatever other shocks come out of North Africa or the Middle East. In the best of cases markets presume that the vote of confidence will go nowhere and in the absence of more commotion they will probably continue to value it at the same level as today. If on the other hand some black swan pops out of pandora’s box or if the markets feel uncertain about the result of the vote of confidence, then all hell will break loose on Portugal and things will look much worse.
But here is the problem: even my best case scenario looks bleak at best, because the markets are already pricing Portuguese debt pretty highly. So, short of getting all of the Eurozone to buy the debt at a discount, outside the context of the EFSF, Portugal will most likely have to issue debt at interest rates above the 7% target it set itself.
I’m going to risk venturing a guess. Someone will say or do something stupid that’ll make markets jittery fairly close to the vote. This will tick them off and CDS on Portuguese debt are going to go through the roof. As a result the main opposition party will announce its intention to vote in favour of the motion. At that point histerical clamours will come from European capitals about the need for orderly and mature political opposition in Portugal, but unless they offer Pedro Passos Coelho something tangible, such as extraordinarily favourable conditions in the eventuality of a future Portuguese rescue, it will be to no avail. Two things may happen at that stage, which will inevitably lead to the same result: either the prime minister decides to post-pone the auction (which in light of the schedule of the state’s obligations might not be possible) and resigns or he goes ahead with the auction, does terribly and is “fired” shortly thereafter through the confidence vote. Interestingly, the main winner of this sequence of events would be the Left Bloc, because it took the offensive and showed clarividence.
Of course I could be wrong. I’d be happy to be wrong. But unless no one says or does anything stupid I would doubt it… And normally I find that stupidity is rather more reliable than enlightenment.

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One Response to Euro Update(18): Portugal in the dangerous month ahead

  1. Pingback: Events to look out for in March 2011: Debt Auctions | Place du Luxembourg

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