Is Portugal about ready to implode?
That's what one hedge fund manager believes. For now, interest rate action suggests otherwise.
We will explore the case for implosion but first consider this chart of 10-year sovereign bonds.
Portugal 10-Year Sovereign Debt Yield
One certainly could have made a fortune plowing into 10-year Portuguese bonds. Does that mean Portugal is out of the woods?
I don't think so, and neither does Tortus Capital hedge fund manager David Salanic.
The New York times describes the setup in A Lonely Bet Against Portugal’s Debt, but I am more interested in Tortus Capital's thesis.
Salanic maintains the status quo is not sustainable. Here is his overall thesis.
Portugal Debt Implosion Thesis
- The Troika Program is off track. Portuguese bondholders are at the mercy of that market.
- Portugal has excessive public and private debt financed from abroad. Portugal can neither grow nor devalue that debt.
- Austerity fatigue has set in as the people carry the full burden of the adjustment.
- Corporates are defaulting en masse and cannot sustain their debt burdens, leading to a vicious cycle of deleveraging.
- The long-term outlook is bleak.
- Debt-to-GDP is very high and growing one percent per month. Portugal is the third most leveraged country in the Eurozone.
- Accounting for growth and interest expense, Portugal's debt is the highest in the Eurozone and is not sustainable.
- Portugal can neither raise taxes nor cut expenditures, leaving little room to improve debt-servicing capacity.
- 40 consecutive years of deficit and 18 years without a primary surplus confirm that Portugal cannot sustain so much debt.
- In the most optimistic case, the Portuguese sovereign has at least 30% too much debt.
Salanic does a fantastic job presenting his case in a 62 page document, Rehabilitating Portugal.
I recommend reading the presentation in entirety, but here are a few charts.
click on any chart for a sharper image
Missed Deficit Targets
Missed GDP Targets
Inability to Outgrow or Devalue Debt
Corporate Debt Levels
Debt to GDP
Debt to Revenue
Interest Expense vs. Revenue
Target 2 Liabilities
That was a lot of charts, but there are another 40 or more in the article. I didn't count.
Other than target 2 imbalances (debt owed to other countries), Spain appeared at least as bad in most of the comparison charts.
Portugal alone is enough to sink the Eurozone given ECB leverage.
I have said repeatedly there is absolutely no way the Eurozone can stay intact and the above analysis strongly supports my claim.
That bond yields are so low in spite of the fundamentals is not an indication things are getting better. Rather, it is a strong sign of a bubble-supportive speculative mentality that central banks have fostered.
I do not know what the catalyst for a breakup will be, or when it happens, but Portugal is clearly back on my radar of things to watch.
Sincere thanks to Tortus Capital fund manager David Salanic for an outstanding report.
Mike "Mish" Shedlock