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Thursday, March 28, 2024

Portuguese Debt About to Implode? What About Spain?

Courtesy of Mish.

Is Portugal about ready to implode?

That’s what one hedge fund manager believes. For now, interest rate action suggests otherwise.

We will explore the case for implosion but first consider this chart of 10-year sovereign bonds.

Portugal 10-Year Sovereign Debt Yield

One certainly could have made a fortune plowing into 10-year Portuguese bonds. Does that mean Portugal out of the woods?

I don’t think so, and neither does Tortus Capital hedge fund manager David Salanic.

The New York times describes the setup in A Lonely Bet Against Portugal’s Debt, but I am more interested in Tortus Capital’s thesis.

Salanic maintains the status quo is not sustainable. Here is his overall thesis.

Portugal Debt Implosion Thesis

  • The Troika Program is off track. Portuguese bondholders are at the mercy of that market.
  • Portugal has excessive public and private debt financed from abroad. Portugal can neither grow nor devalue that debt.
  • Austerity fatigue has set in as the people carry the full burden of the adjustment.
  • Corporates are defaulting en masse and cannot sustain their debt burdens, leading to a vicious cycle of deleveraging.
  • The long-term outlook is bleak.
  • Debt-to-GDP is very high and growing one percent per month. Portugal is the third most leveraged country in the Eurozone.
  • Accounting for growth and interest expense, Portugal’s debt is the highest in the Eurozone and is not sustainable.
  • Portugal can neither raise taxes nor cut expenditures, leaving little room to improve debt-servicing capacity.
  • 40 consecutive years of deficit and 18 years without a primary surplus confirm that Portugal cannot sustain so much debt.
  • In the most optimistic case, the Portuguese sovereign has at least 30% too much debt.

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