Ten Countries Most Likely To Default

Bottom 10 Sovereign CDS ranked by spread at end-March 2012

Name    5Y Spread   Change   % Change   Feb ranking
Cyprus     1183             4              0%             N/A
Portugal   1075          -90            -8%             2 (0)
Ukraine      859         101            13%            4 (+1)
Argentina   809           32             4%             3 (-1)
Venezuela  712          -13            -2%             5 (0)
Ireland       572          -27            -5%             6 (0)
Hungary    546            50           10%             8 (+1)
Egypt        544           -52            -9%              7 (-1)
Lebanon    459          -17            -4%               9 (0)
Spain         428           55            15%             16 (+6)

Source markit

Greece is not on the list, because it has already defaulted.

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Quelle Dommage!

One week on from the "Summit To Save The Euro", and it appears that the much hyped "deal" is already unravelling before it is even signed.

Viz:

- Fitch has downgraded a number of banks, including BNP Paribas and Deutsche Bank.

- The leaders of Hungary and the Czech Republic have stated that they are ready to reject the planned treaty changes and implied move towards a centralised tax system. 

- Mario Draghi, the head of the European Central Bank (ECB), warned that the bond-buying programme was “neither eternal nor infinite”.

- Pedro Nuno Santos, vice-president of the Portuguese Socialist Party told MPs:

"We have an atomic bomb that we can use in the face of the Germans and the French: this atomic bomb is simply that we won't pay.

Debt is our only weapon and we must use it to impose better conditions, because recession itself is what is stopping us complying with the (EU-IMF Troika) accord. We should make the legs of the German bankers tremble."

- Greece has yet to agree a deal with its bondholders etc.

Despite the above, the French appear to believe their own hype. France's finance minister Francois Baroin said:
   
"It's true that the economic situation in Great Britain is very worrying and that we prefer being French rather than British on the economic front at the moment. 
 
We don't want to be given any lessons and we don't give any."

As I said last Friday:

"Cameron, over the coming days, will be vilified by many for his actions. However, time will prove that the Eurozone and its "leaders" are not up to the job of running single currency.

Oh, and by the way, the "new treaty" is not yet a done deal. Member states have to formally sign up to it, and at least Poland and Ireland are already discussing having to hold referendums before they sign up!"

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Latvia, a Portent of the Future

Fitch has cut Portugal's credit rating to junk.

It has downgraded Portugal from BBB- (its lowest investment grade rating) to BB+ (the highest non-investment grade), with a negative outlook.

Meanwhile, in Latvia, people are queuing to take cash out of ATMs as stores now only accept cash.

Is Latvia a portent of the EU's future?

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The Mad Hatter's Tea Party

The world economy stands on the precipice, thanks in no small part to the dishonesty and incompetence of politicians around the globe.

Europe faces the collapse of the Euro; as countries such as Greece, Italy, Portugal (which has just "discovered" a Euron2BN budget hole), Spain and Ireland are going to default on their debts.

Meanwhile in the USA, politicians (thanks in no small part to the pig headed intransigence of the Tea Party) continue to fail to raise the debt ceiling.

Wall Street has at last woken up to the very real danger that the politicians will fail the country, and fail to raise the debt ceiling in time, before the USA defaults on its debts. With no signs of progress from Capitol Hill Wall Street is now falling.

Welcome to the Mad Hatter's Tea Party!

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Ireland Downgraded To Junk

Moody's has downgraded Ireland's rating to junk, from Ba1 from Baa3. They are of the view that Ireland will need a secondary bailout.

Ireland now joins Portugal and Greece in the non investment grade hall of shame.

Unsurprisingly the European Commission has issued a statement "regretting" Moody's decision. However, as with all ratings agencies' predictions of doom, there is a very real danger that they become self fulfilling prophecies. The fact the the EC "regrets" it is irrelevant.

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ECB Raises Rates

The European Central Bank (ECB) has raised interest rates by a quarter point to 1.5%, citing its fear of inflation (over recession) as the rationale for the decision.

The ECB's actions have, needless to say, pushed the financially beleaguered Eurozone nations such as Greece and Portugal further towards the precipice.

Cynics are of the view that the ECB's actions deliberately designed to force the weaker nations from the Eurozone.

Whatever the rationale, the decision in the face of the ongoing recession, is utter madness and will end in tears.

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The EU "Does a Canute"

I am more than amused to see that the EU has taken mighty umbrage at the downgrades by the ratings agencies of Greece and Portugal.

Indeed the EU is so annoyed with the ratings agencies that Jose Manuel Barroso, the European Commission president, all but declared that it was an Anglo Saxon conspiracy by all ratings agencies.

All very nice for the soundbites, maybe. However, he conveniently forgot that Fitch is in fact French.

The EU and its whinging ministers have as much chance of turning the ebbs and flows of the markets as Canute did the sea. Unless the EU understands that point, the EU experiment is doomed to fail.

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Portugal Goes The Way of Greece

Moody's have cut Portugal's credit rating by a "whopping" four notches, from Baa1 to Ba2, with a negative outlook.

There are now expectations in the markets that Portugal will need a Greek style second bailout.

Self fulling prophecies are very dangerous!

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Anyone But Brown

The BRICS group of the world's major emerging economies (Brazil, Russia, India, China and South Africa) are peeved that the search for a new head of the IMF, following the demise of DSK, is purely Euro focused.

BRICS claim, with some justification, that only having a European leading the fund somewhat undermines its "international" credentials and legitimacy.

I concur, if a suitable non European candidate can be found.

However, a few counterpoints need to be raised:

1 The World Bank is always headed by an American. As long as that is the case, the Europeans will insist that the IMF is headed by a European.

2 A suitable non European candidate needs to be found. A number of names have bubbled to the surface in the media, from various countries. However, in order for them to stand any realistic chance, the BRICS must first agree amongst themselves which one they will support.

3 The EU (an institution many loath) is in financial crisis, as a result of the debt problems of certain countries (eg Greece, Spain, Portugal, Ireland etc). There is no way that the EU will accept a non European, at this critical stage, to head the IMF. The EU needs a "friend at court".

Political reality is a harsh mistress.

However, there is one thing that the EU and BRICS can all agree on; no one wants Gordon Brown to head the IMF!

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Chinese Whispers

It seems that it is not just Portugal, Ireland, Greece and Spain (aka "PIGS") that are under the gimlet eyes of the ratings agencies.

The UK has now also come under attack from the ratings agencies. Bloomberg reports that Dagong Global Credit Rating Co., one of China's official ratings firms, has cut its credit rating for the UK by one notch to A+.

Dagong cite the UK's deteriorating ability to repay debt, much the same reason used by other agencies when they downgraded the "PIGS".

However, we are not alone, the firm also reduced its rating on the US to A+ from AA last November citing a deteriorating intent and ability to repay debt.

Cynics might argue that ratings agencies' ratings/prophecies more often than not become self fulfilling, as the very act of downgrading a country increases that country's costs of borrowing.

Were the agencies to abuse their power, there would be opportunities for individuals, companies and countries connected with them to make a lot of money at the expense of others.

Needless to say, as with other aspects of the global financial services industry, the behaviour, quality and ethics of these agencies is beyond reproach.

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Good Money After Bad

Despite the arrest of the CEO of the IMF, Dominique Strauss-Kahn, the IMF and EU have managed to come up with the eurozone's third bailout package.

This time Portugal is holding out the begging bowl, and will receive Euro78BN. Europe will provide Euro52BN at 5.5%, and the IMF will provide Euro26BN at 3.25%.

Needless to say this bailout is merely putting off the day of financial reckoning. No one seriously expects Portugal to be able to pay off this debt.

As for Mr Strauss-Kahn, it is rumoured that he/IMF may seek diplomatic immunity.

Were that to be true, that would produce one almighty diplomatic/political and financial bust up between Europe and the States.

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Portugal Bailout

Jose Socrates, Portugal's caretaker prime minister, has stated that Portugal has followed Ireland and Greece and agreed to a $78BN bailout from the EU and the International Monetary Fund (IMF).

However, the deal will need broad cross-party support because Mr Socrates resigned last month (as a result of not being able to pass a budget) forcing a general election on 5 June.

Additionally, the interest rate on the bailout loan will not be set until mid May.

Using debt to pay off debt, is of course merely pushing back the day of reckoning.

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ECB Loses Touch With Reality

The Telegraph reports that Moody's have downgraded Ireland's debt rating by two notches to Baa3, adding a "negative" outlook.

The cause of the negative outlook?

The ECB's increase in rates!

As has been noted before on this site, the ECB is living on another planet when it comes to the current financial turmoil in Europe. Increases in rates (to appease the gods of monetarism) will cause more problems for the Euro; as those countries in financial ruin (eg Ireland, Greece, Spain and Portugal) cannot afford to pay the current rates on their debts, let alone higher ones.

Until the ECB is taken in hand, by those who live in the real world, this situation will worsen.

The other solution is for Ireland et al to leave the Euro.

Maybe this is what the ECB is hoping for?

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Portugal Asks For Help

Portugal has finally succumbed to pressure and, late on Thursday, asked the EU for an Euro 80BN bailout.

The European Union is to negotiate the terms with Portugal, once they have decided the scope at a two-day summit in Budapest.

The problem is that Portugal's caretaker government is unlikely to be able to pass the austerity measures that will be the conditions of the bailout.

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Moody's Downgrades Portugal

The ratings agency Moody's has cut Portugal's long-term rating to Baa1 from A3. To add to Portugal's woes, there are reports that Portuguese banks are threatening to stop buying government debt.

All of this comes as today Portugal tries to raise about Euros 1BN on the bond market in order to service its debts (before it tries to refinance them in the summer).

Thus the pressure is mounting, on whoever is running the country, to go cap in hand to the EU to ask for a bailout. Were this to happen the conditions of the bailout will be onerous in the extreme, and not likely to be acceptable to the people of Portugal.

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The Sinking Euro Ship

The Economist Intelligence Unit has issued a report which states that there is a one in seven chance that Europe's ongoing debt crisis will cause member nations to abandon the Euro.

However, the report manages to muddy the waters by also stating that there is a 50% probability that the eurozone will get through the crisis.

Given how close to economic meltdown some member states (eg Ireland, Spain, Portugal and Greece) are, and that the wealthy states (eg Germany) are thoroughly fed up with propping them up I would suggest that the one in seven probability is massively understated.

It should also be noted that the ECB is likely (despite all reason and commonsense dictating that it shouldn't) to raise interest rates this Thursday. Any increase in rates will worsen the economic situation, and make it even more likely that member states will abandon the ill fated Euro experiment.

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The Eurozone Crisis - Spain Is Next

All eyes have been focused on Portugal, Ireland and Greece as the Eurozone slowly unravels. However, spare a thought for the next in line for financial chaos namely Spain.

Banco Base (Spain's 3rd largest savings bank) has asked for Euro 1.45BN in state funds to meet "new local capital requirements".

The Euro, as it currently stands, is destined to fail. At best there may be a two speed Euro (split along a North South axis). At worst, the Euro will cease to exist.

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EU Pressures Portugal

The EU is putting pressure on Portugal to come cap in hand to the EU for a bailout.

Ewald Nowotny, a governing council member of the European Central Bank, is quoted in the Telegraph:

"From a purely economic point of view one could probably recommend it. The domestic political situation in Portugal has clearly worsened ... the head of the government has stepped down."

Why such advice?

Philanthropy?

No, this is purely self interest based on fear of the Eurozone unravelling as a result of economic chaos in Portugal. Were Portugal to accept a bailout, the people of Portugal would end up having to sacrifice their economic well being for the future of the Euro.

Is this something that they really want?

It is not just Portugal that threatens the Euro, Ireland will need further refinancing and Spain is looking decidedly unstable as well.

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Crisis? What Crisis?

Unsurprisingly, given the resignation of the Prime Minister (Jose Socrates) and the ongoing budget turmoil, Portugal has had its credit rating downgraded by Standard & Poor's to BBB and by Fitch to A-.

Despite the turmoil and the downgrade, the EU have delayed making a decision as to providing a "comprehensive package" to tackle the eurozone debt crisis.

Instead the EU has adopted the ostrich policy of sticking its head in the sand. Jean-Claude Trichet, President of the European Central Bank, said that Portugal must implement the fiscal austerity measures that Mr Socrates had proposed.

All very well, but it is precisely those austerity measures that were rejected along with Mr Socrates!

As ever, the EU displays a remarkable talent for being out of touch with reality.

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The Wisdom of Socrates

Jose Socrates the Prime Minister of Portugal has "fallen on his sword", as a result of his austerity budget being voted down by all the opposition parties.

Socrates had stated, prior to the vote, that if the budget was defeated he would resign.

The result of this defeat is that the country probably has to stage a general election and, because it has no budget, will have to be propped up by the EU in order to prevent the financial collapse of Portugal and the unravelling of the Euro.

Socrates is a canny man, and has probably saved his country from an austerity package that would have cause chaos domestically.

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