Tuesday, 07 December 2010 09:54

The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History

There are more and more "professionals" in the mainstream media stating that they expect European defaults. What is interesting is that as there is at least a minority of pundits that are facing this inevitable event. European (and American) equity markets are still chuggling the global liquidity elixir awash in the markets and moving ever higher. From Bloomberg: Shrinking Euro Union Seen by Creditors Who Cried for Argentina

Nine months before Argentina stopped paying its obligations in 2001, Jonathan Binder sold all his holdings of the nation’s bonds, protecting clients from the biggest sovereign default. Now he’s betting Greece, Portugal and Spain will restructure debts and leave the euro.

Binder, the former Standard Asset Management banker who is chief investment officer at Consilium Investment Management in Fort Lauderdale, Florida, has been buying credit-default swaps the past year to protect against default by those three nations as well as Italy and Belgium. He’s also shorting, or betting against, subordinated bonds of banks in the European Union.

“You will probably see at least one restructuring before the end of the next year,” said Binder, whose Emerging Market Absolute Return Fund gained 17.6 percent this year, compared with an average return of 10 percent for those investing in developing nations, according to Barclay Hedge, a Fairfield, Iowa-based firm that tracks hedge funds.

He’s got plenty of company. Mohamed El-Erian, whose emerging-market fund at Pacific Investment Management Co. beat its peers in 2001 by avoiding Argentina, expects countries to exit the 16-nation euro zone. Gramercy, a $2.2 billion investment firm in Greenwich, Connecticut, is buying swaps in Europe to hedge holdings of emerging-market bonds, said Chief Investment Officer Robert Koenigsberger, who dumped Argentine notes more than a year before its default.

No disrespect intended to these fine gentlemen and distinguished investors, but the default of several of these states is simple math. You cannot take 8 from 10 10 from 8 and come up with a positive number. It really does boil down to being just that simple in the grand scheme of things. I actually released a complete road map of Portugal's default yesterday (see ), and today I will walk those who are not adept in the area through it with simple graphs and plain vanilla explanations.

This is done as a preview for our subscription only Ireland, Spain and Greece default scenarios. These scenarios, while still denied by most, are actually just the tip of the iceberg, for they will do much more damage together than they could ever do separately. As a group, they will make the Argentina event look like a bull rally. That is where the contagion models come into play (see Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!). Any institutions or professional investors who are interested in accessing our research should subscribe here. To my knowledge, I believe BoomBustBlog is the only source on the publicly available web for such information.

This is what the Argentinian referenced in the article above did to investors...


Price of the bond that went under restructuring and was exchanged for the Discount bond


That’s right! Ouch! Imagine this times 10! That is what we are looking forward to. Let's jump straight into Portugal's situation, and remember that many of these countries have deliberately mislead and misrepresented their fiscal situations for years (see Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest? and Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!).

This is the carnage that would occur if the same restructuring were to be applied to Portugal today.

Yes, it will be nasty. That 35% decline in cash flows will be levered at least 10x, for that is how much of the investors in these bonds purchased them. A 35% drop is nasty enough, 35% x 10 starts to hurt the piggy bank! As a matter of fact, no matter which way you look at it, Portugal is destined to default/restructure. Its just a matter of time, and that time will probably not extend past 2013. Here are a plethora of scenarios to choose from...

This is Portugal's path as of today.

Even if we add in EU/IMF emergency funding, the inevitability of restructuring is not altered. As a matter of fact, the scenario gets worse because the debt is piled on.

Let it be known that there are larger sovereign states that are worse off. There are other states that are not in as bad a shape but are poised to do much more damage,  and then there are a plethora of states that will get dragged down through contagion. Yet, the natural manner of pricing risk in the equity markets does not transmit these facts because of the unprecedented amount of liquidity stemming from central bankers around the world doing the Bernanke/Japanse QE thing.

Anyone interested in seeing the entire scenario analysis for Portugal should look here, you will find it nowhere else:

Anyone wishing to see even more advanced analysis for the larger and strategically more important nations should subscribe here. Those who are just interested in reading more can go through my entire Pan-European Sovereign Debt Crisis series. I have been writing much about the Irish situation as of late as well.

Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default…

Tuesday, November 30th, 2010

Let’s take a look at the cumulated funding requirement of Ireland over the next 15 years.

Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor!

Monday, November 29th, 2010

The BoomBustBlog Contagion Model: How We Predicted 9 Months Ago That The UK and Sweden Would Rush To Bail Out Ireland, and Why

Friday, November 26th, 2010

Merkel Points to `Serious’ Bailout Risk as Spanish Bonds Drop, Reggie Middleton says “Ya Damn Skippy” – Here’s How We Called It

Tuesday, November 23rd, 2010

Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up???

Monday, November 22nd, 2010

If the World Knew What BoomBustBlogger’s Know, Would Ireland Default Today?

Wednesday, November 17th, 2010

As We Have Clearly Anticipated Since Early 2010, Ireland is About to Go

Monday, November 15th, 2010

How Likely Is Greece to Default? It Would Be a Downright Miracle If They Didn’t! Numbers Don’t Lie, Although Some Sovereign Reporting Agencies Do! Let’s Walk Through the Math…

Thursday, October 7th, 2010

Last modified on Tuesday, 07 December 2010 11:27


  • Comment Link Jules Seaman Tuesday, 14 December 2010 21:42 posted by Jules Seaman

    Great article!!

  • Comment Link Maria dos Santos Thursday, 09 December 2010 11:09 posted by Maria dos Santos

    Reggie,I am stuck here in the UK and know full well,even though our government and its shills(the BBC),are lying to us;how do I protect what little money I have?Believe it or not,the bank I bank with have tried repeatedly to assure me everything is okay even when I show them your analysis-though to be fair the guy who was talking to me looked quite ill when I showed him your work.Thanks for your help.

  • Comment Link NDbadger Wednesday, 08 December 2010 11:02 posted by NDbadger


  • Comment Link Reggie Middleton Wednesday, 08 December 2010 05:31 posted by Reggie Middleton

    I am going to work on a strategy map for subscribers next week that will lay out a few ideas.

  • Comment Link NDbadger Tuesday, 07 December 2010 22:30 posted by NDbadger

    So how should a retail investor position himself in the face of widespread sovereign defaults? As a retail investor, I cannot buy CDS on sovereign debt.

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