Feeding a Monstrous Pile of Debt.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Under Mario Draghi’s radical stewardship, the ECB seems determined to push the limits of monetary experimentation. And by all accounts, it’s succeeding.
This week saw numerous eurozone governments sell bonds at negative rates, an economic anomaly that has no place in a rational world. Even some mainstream economists still seem confused by it. Unfortunately, thanks to the tireless efforts of central bankers around the globe, we stopped living in a rational world a long time ago.
Feeding a Monstrous Pile of Debt
The latest government to enjoy the perks of negative-interest-rate living is Portugal. That’s right, Portugal, a country that four years ago was selling 12-month notes with an average yield of 6% amidst fears about the government’s ability to service its monstrous debt pile, is now able to sell €1.1b billion of 12-month debt at a -0.06% yield. In other words, if investors hold the bonds to maturity they will actually pay the Portuguese government – a government that doesn’t yet exist – for the privilege of holding its debt.
This is despite the fact that Portugal has not only a perpetually stagnating economy but also one of the highest debt-to-GDP ratios in the world. After four years of so-called “austerity,” Portugal’s combined public and private debt is now a mind-blowing 530% of GDP, with total corporate debt expected to reach 240% of GDP.
Most of the country’s public debt is foreign owned, and while there aren’t any reliable figures on who exactly owns the private debt, it is a fair bet that it is also mainly foreigners (and, of course, local banks). In other words, the country’s heavily-levered corporate sector is sitting upon the granddaddy of tick-tocking debt time bombs.
Even compared to the total debt amassed by all the other rickety economies of Southern Europe, Portugal is punching well above its weight. Italy has a total debt ratio of 369.5% and Spain, 418.3%. Even Greece, a country that barely has an economy left to speak of, has a debt ratio (354%) significantly lower than Portugal’s.
Yet that didn’t stop Portugal from becoming the latest country to join Europe’s far from exclusive sub-zero debt auction club. Spain also became a member of the club on Tuesday after selling €3.5 billion worth of 12-month bonds at a -0.049% yield, leaving one to wonder how long it will take before Greece’s government of reformed leftists receives a membership form in the mail.
No Government, No Problem?
None of this should be happening. Indeed, in a parallel universe where Quantitative Easing and negative interest rate policy have not been invented and big bankrupt banks are actually allowed to go bankrupt, none of this is happening. Unfortunately, in this universe, it is.
Perhaps the most unfathomable aspect of the mad rush to buy Portugal’s negative yielding debt is that the country doesn’t even have a government to speak of, after last month’s general elections gave no party a clear majority. In fact, the country doesn’t even have a projected budget for 2016.
If there is to be a government at some point in the near future, it’s almost certain to be one composed of left-wing parties that have already been branded too dangerous for office by the country’s president, Anibal Cavaco Silva.
Before deciding whether to ask socialist leader Antonio Costa to form a government, Silva spent the last week or two doing what all politicians do when they don’t know what to do – i.e. consulting the opinion of some of the country’s top bankers. According to Reuters, Portuguese bankers appeared cautiously optimistic that any future Socialist government would stick to the course of budget consolidation despite concerns among some investors that it might prove spendthrift.
“If Antonio Costa is named the next prime minister, I’m confident that he and the Socialist Party will have the required sense of responsibility to keep the country on a rigorous path and will guarantee the stability of the financial system,” said Banco BPI’s eternally optimistic CEO Fernando Ulrich.
“Just How Low Can Mario Go?”
In the end Silva will have little choice but to name Costa prime minister. It’s only then that we will find out just how determined the new coalition parties are to fulfill their election pledges and reverse the previous government’s austerity policies – policies which, it’s worth noting, have done next to nothing to improve the country’s hideous debt trajectory or put its stagnant economy back on something remotely resembling a growth path: in the last quarter Portugal achieved just 0% growth despite access to virtually free debt.
Meanwhile, the question on investors’ minds is, “Just how low can the Grand Master of European financial alchemy, Mario Draghi, go?” The answer to that question appears to be: “much lower.” There is already a growing consensus that the European Central Bank will unveil a fresh round of “stimulus” at its December meeting.
And it’s for that reason – and that reason alone – that the governments of deeply dysfunctional economies like Portugal and Spain are able to sell their debt to foreign or domestic investors for cheaper than free. In today’s eurozone experiment, it’s not so much that fundamentals have taken a back seat; they’ve left the car altogether. By Don Quijones, Raging Bull-Shit.
Passos Coelho, when still Prime Minister of Portugal, knew “what to do.” After signing the €78-billion bailout, he embraced the Troika’s agenda with abandon. Public spending was slashed, taxes were hiked, wages were cut, and public assets and services were privatized, while the public debt continued to balloon. But now there’s a price to pay. Read… Is the Troika About to Lose Control of South-Western Europe?