Monday, December 14, 2009

Next up, Portugal?

Surprisingly, it has not been Spain that got the most spillover from Greece's woes, but its neighbor in the Iberian peninsula famous for its sweet wine and most overrated football player. In fact, according to Nomura, this isn't a surprise, as they note:
Recall the Socialist government was returned to power in the September elections and promptly revised its 2009 budget deficit forecast to 8.0% from 5.9%. While much lower than the revisions that occurred in Greece, the situations do have clear similarities. And with 2010 budget deliberations not due to be finalized until January, we expect this to come much more into focus. We also see Portugal as one of the higher-risk credits on the score of rollover burdens, with a higher proportion of its debt to be recycled over in the coming year.
The graphs below are from the same research note and summarize not only Portuguese bonds' relative underperformance, but also note that the future looks challenging as well.

I don't want to relate everything to Turkey, but when I also think about Ireland and Latvia, whose bond markets have been doing relatively well of late, I tend to think that it is after all, mostly fiscal, as the IMF stands for. After all, Spain and Latvia have managed a fairly bit of fiscal consolidation. According to a recent research note from Barcap:
The IMF, the OECD and the European Commission have identified that successful fiscal consolidation depends upon current expenditure cuts as opposed to revenue increases, including social spending, sometimes accompanied with a fiscal rule or multi-annual target. In practice, this implies that civil servant wage cuts, social benefits cuts and pension reforms are key elements for a successful fiscal adjustment. Adjustments that would rely exclusively on duty rises, indirect tax increases, or fiscal fraud measures or “savings” without any specification are unlikely to qualify as rigorous.
When you look at Ireland and Latvia, you see that they have engaged in the right kind of fiscal consolidation, as this is exactly what they have been doing. And this is also where the 2010 Turkish budget gets it all wrong!

I think I have found the topic for next week's column already:)....

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