Portugal could be forced to inflict haircuts of up to 50% on private creditors

27th January 2012

One of the themes of this blog has been concern over the economic situation in the Iberian peninsula where both Spain and Portugal have serious problems to address. This is not as clear-cut as you might think as whilst the situation is opaque and apparently not recorded well they seem to trade together less than you might assume. However there has been an increase in trade in the Euro era, which I record as it is rare these days to read of a benefit from the Euro.


I expressed my fears for Portugal back on the 17th of January when I described the decline of her economy thus.

"Indeed this reminds me so much of back in 2010 when I was writing that the Greek experience was likely to be much worse than projected. Unless something unexpected happens for the better I expect 2012 and probably 2013 to be dreadful years for Portugal and her economy. I wish that their previous finance minster had taken some note of the alternative strategy that I sent him."

Since then financial markets have begun to catch up with the reality of Portugal's economic situation. Her ten-year bond yield went above 15% yesterday and even intervention by the European Central Bank has helped little as it has been above 15% again this morning. Even worse she has exhibited one of the signals that Greece exhibited as her spiral downwards accelerated and that is that shorter-dated bond yields rise above (eventually significantly above) the ten-year yield. For example her three year yield has risen above 20%. I fear for her.

Interest rate and mortgage rate rises will not help

Here are the latest figures in this area

"The interest rate implicit in all contracts of mortgage loans was 2.720% in December, up by 0.015 percentage points from the rate observed in November.  For the contracts signed over the last 3 months, the implicit interest rate was 4.598%, 0.120 p.p. higher than the rate observed in the previous month."

The language is somewhat confusing here as the lower rate is for all mortgages and the higher for recent mortgages. So we immediately get the impression that mortgage rates have been rising in Portugal for a while and scanning the underlying data tells us that from December 2010 to December 2011 they rose from 3.07% to 4.6%. Perhaps there will be a lagged effect from the European Central Banks interest-rate cuts at the end of 2011 and the long-term repo of 489 billion Euros that it enacted was after these figures. But for now there is quite a gap between the official short-term interest rate of 1% and the mortgage rate of 4.6%.

However you choose to interpret the whys and wherefores the average monthly repayment on a Portuguese mortgage rose from 259 Euros a month to 281 in 2011.

And if bank valuations are any guide this is hitting the housing market.

"The average value of housing bank appraisals in Portugal stood at €1073/sq meter in December, down by 1.4% from November and by 5.1% from December 2010…….. In the year 2011, the average value of bank evaluation on housing was €1121/sq meter, corresponding to a decrease of 3.0% from 2010."


The official story is that Spain's government is working hard to reduce her fiscal deficit and that austerity is being applied which means that everything is under control.

Read more…


More from Mindful Money:

Hungary could prove more damaging to the Eurozone than Greece

Davos – Solution or part of the problem?

Sarkozy losing the French election could have disastrous consequences for the Eurozone

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