Sunday, April 18, 2010

Moving on - Portugal? Spain? France?(!)

Baseline Scenario makes the argument that Portugal is the next target of CDS speculators, and while reading the article made me think of this line:

Then there was Portugal, half-senile and three-quarters bankrupt, hoarding her ancient possessions in Africa[.]

It's from "Scramble for Africa" (Thomas Parkenham). I've read it multiple times - great stuff. What was true in the 19th century (and through to WWI), true today.

Back to Baseline Scenario:
To resolve its problems, Portugal needs major fiscal tightening. For example, just to keep its debt stock constant and pay annual interest on debt at an optimistic 5% interest rate, the country would need to run a 5.4% of GDP primary surplus by 2012. With a 5.2% GDP planned primary deficit this year, they need roughly 10% of GDP in fiscal tightening. It is nearly impossible to do this in a fixed exchange rate regime – i.e., the eurozone – without massive unemployment.

I'm leaning towards the ZH position, that France is the bigger target, because they're literally the bigger target:
CDS traders are now focusing their attention on the one country which has so far slipped under everyone's radar, yet which we disclosed is more on the hook in terms of Southern European exposure than even Germany: France, with $781 billion in total claims. Should Greece topple the PIIGS dominoes, France will implode. And this is precisely what CDS traders are betting on now, taking advantage of absurdly tight France CDS levels.


And as for you, Angela Merkel - who exactly is going to be left standing to be on the receiving end of your export economy model? Take your sanctimonious prattle and cram it down your throat.