The Central Bank of Portugal released their Financial Stability Report for November today and it’s an utter nightmare. They do everything except admit that they are bankrupt. This is just one more case proving that fiscal austerity does not help in times of a debt de-leveraging cycle:
“The Portuguese financial system is facing several serious challenges, arising from the international financial instability, particularly marked in Europe during 2010, and worsened, in the Portuguese case, by the need of adjustment of structural imbalances, which are becoming more severe. The strong deterioration of the prospects of international financial markets players on the sustainability of the public finances situation in Portugal has been reflected in a strong increase in the risk premium on sovereign debt, which has had negative repercussions on the Portuguese banking system’s access and funding costs in the international wholesale debt markets. This increase in risk premium occurred against a background of a significant differentiation in sovereign risk assessment in the euro area. The imbalances of the Portuguese economy are not only associated with a worsening fiscal situation but also with a persistent and significant deterioration of the economy’s external position, against a background of high levels of private and public indebtedness and low economic growth over the course of the last decade.
As the Portuguese economy’s external indebtedness has been almost fully intermediated by the public sector and the banking system, these sectors’ difficulties in access to financing in the international debt markets force the intensifi cation and acceleration of the adjustment between the Portuguese economy’s savings and investment, involving all institutional sectors.” (emphasis added).
The Portuguese 10 year is sitting at 7.1% this morning. It looks like a foregone conclusion that they’ll need aid at some point in the first half of 2011. And given the bailout fever at the IMF and the desperation of the core nations to effectively save their own banks you have to wonder why bondholders won’t continue to push the issue here. Down the line we go….
You can read the full report on their website here.