Uh Oh – Citi Economists Think Portugal is Next in Line to be the New Greece

The Real Question – Who is Next in Line Behind Portugal

The Greek bailout is just about complete, with private investors getting ready to take a 50%+ haircut on the Greek sovereign debt that they own.  The Troika (the IMF, the ECB and the European Union) has said that this will be the last time private investors have to take a haircut.  Citibank economists say “no way”.

Citi analysts have attempted to explain the Portugal enigma, which they note now has the country’s 10-year bonds trading at some 1,000 basis points above Bunds.

The reason, Jurgen Michels and team say, is simply that the country is not on a sustainable fiscal path:

In earlier assessments of its debt position, we argued that Portugal would not be able to move on to a viable fiscal path without a haircut of 35% by the end of 2012 or in 2013. While we acknowledge that Portugal is in many aspects different from Greece, we now conclude that the size of the haircut will need to be raised to 50%, most likely taking the form of a reduction in the debt held by the private sector. We argue that the size of the haircut will depend on the macroeconomic situation, the amount of arrears that the government will need to settle, and the size of contingent liabilities that will require financing. In any case, assuming that market access cannot be regained before 2016, Portugal would need an extension in its official funding of between €50bn to €65bn.

Portugal is doing what the Troika said to do, and that is a large part of the problem.  The country is forecast to be able to get money from the private credit markets in 2013, an outcome most of us say is impossible.  So part of the problem is pure denial, and a position that hopes for the best while not preparing for the worst likely.

[thanks to Tyler Cowen]