Portugal’s bond auction – behind the ‘Pravda’ headlines

Reuters headline is that the yield on Portugal’s ten year debt dropped due to high demand at this auction.

Which as the article goes on to suggest, averts bond disaster and lowers the pressure on Portugal.  I see this as the now customary Pravda style “all news must be good news”.

What the facts tell us is somewhat less glorious.  There was demand for the debt so that Portugal did sell the whole amount.  What we don’t know is how much of that demand was actually the ECB or proxy buyers for the ECB.  We can be fairly confident quite a lot was bought by the ECB on the grounds that the ECB has stepped up its buying of European national debt specifically to avoid a no bid and the subsequent panic in the market.

Once we factor in the ECB we can no longer say there was any great demand for Portugal’s debt.  If there had been ‘real’ demand and not the fake demand of the ECB, then we would have seen the yield and coupon (measures of the rate Portugal will pay for this borrowing) drop. We did not see any great drop.  Despite  ECB intervention the yield only edged down from 6.8 in November to 6.7 % now.  That is a pathetic 0,1% drop.  What it tells me is that despite the efforts of the ECB, the other bond buyers were not impressed or fooled and would not buy unless at very nearly the same rate as before.

You could say well at least the rate didn’t go up. Yes.  The ECB achieved that.  But a rate of 6.7% is till unsustainable for Portugal because it will not earn anything like that rate with the money it has borrowed. Portugal’s growth will be far, far below 6.7%.  So Portugal will be paying out far more than it is earning. I.E. they will continue on their way, now a crowded way full of Greeks and Irishmen, on their way to insolvency.

The worse part of the auction news for Portugal was what  happened to the rate on its shorter term debt.  The rate on its five year debt jumped up from 4% last October to 5.396% today.  That is a hefty increase in borrowing costs. It seem obvious to me that the ECB was buying the 10 year and left the 5 year to fend for itself.  To my mind that means the 5 year is a better, less manipulated view of the real state of Portugal’s situation.  And it’s not good. An increase of 1.4% in just three months is very bad indeed.  Think of what such a rate increase would do to your mortgage payments.

So where the ECB stepped in, the rate dropped 0.1%  Where it did not, the rate shot up 1.4%. The jump up was 14 times larger than the drop down.

Pravda reports another glorious victory for our invincible leaders. I say another division was decimated.  You choose.

5 thoughts on “Portugal’s bond auction – behind the ‘Pravda’ headlines”

  1. Portugal! What r you doing, we thought you were sure to join us at the back of the class?? We're soooo lonely (Greece is too far away whereas as you and us – we're long lost Celtic cousins!) We could have formed a gang and peer pressured Spain into joining us, we could've legalised drugs too. We'd be the cool gang and the added tourism would've helped us out no end. Then we could've all held hands like Thelma and Louise plus one and all jumped off the default cliff together in one glorious moment of freeeeeedoooom!

    No…

    YOu don't think it sounds fun, well fine then. We're not talking not even broken english hand signals talking. Its cos of Lisbon isn't it? It wasn't the name we didn't like it was the contents… honestly.

    On a more serious note, want to add my prayers and best wishes to Golem's family health. The Chinese year 2010 was the year of the Open Mouth Tiger, i think we can all agree its living up to its name -the next one is supposed to be slightly more cuddly – here's hoping after Feb 3rd everything starts to change for the better. So Happy 2011 to all.

  2. Hi Golem

    Your topic title has a 'd' missing from the last word.

    Looking beyond Portugal I notice that Poland's 10-year bonds are yielding 6.2%. Clearly, Poland's prospects are better than those of Portugal, but there must be an underlying reason for the high percentage.

  3. Hi Golem

    thank you so much for this incredible blog. I'm learning so much from it. After reading this entry, I started thinking to myself "who are these people in Reuters writing this stuff? And are they liars or merely clueless?". So I clicked on the link to the Reuters article and at the end it says "Reporting by Andrei Khalip; Editing by Ruth Pitchford".

    Who are these people?

  4. Golem XIV - Thoughts

    Friendlyguy,

    I am glad this blog speaks to you. I think more of them are drawn from teh ranks of the clever clueless than are liars. People who are quick to understand how a system works but slow to ever question it.

    They have bought in to a system they are not inclined to question particularly as it pays them well not to,.

    Glad you've found us.

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