[Russ Winter]

Pobre Portugal, without the ability to rig and manipulate markets, see its bonds being trashed. The ten-year hits 17%, and the 5 year over 22% in Monday’s action. Portugal yields are about where Greece was four months ago.  The conventional wisdom says this is because they have Greek like debt.  That is  not true. Portugal debt to GDP is now 100% with 107% expected on 2013. That’s a little below that of the US, versus 160% for Greece.  Further Portugal has agreed to serious austerity measures, which has resulted in a drop in GDP this year of 3-5% (a near Depression), depending on who you listen to.  Unlike Greece the EU is generally pleased with Portugal’s adherence to its wishes. Unfortunately Portugal fatal error was guaranteeing about 35 bn euros of its bank’s borrowings, greatly exposing the small country to severe contingent liabilities.

 Portugal is going to need a debt haircut.   If done properly it may not have to be much more than 25%.  But in my view,  Portugal is another victim of the bond subordination nonsense going on in Europe [see for more]. The math is pretty straightforward here, and I will not even include the potential banking liability.  About €25 billion in UK-law Portuguese bonds trade out of €104 billion and the ECB holds €20 billon, leaving €59 billion in the hands of local-issue holders, namely Tia Miriam (Aunt Millie) pensions and Portuguese and Spanish banks.  So if Portugal needs a 25% debt reduction to get back on track, and the ECB refuses to participate, and the UK law bondholder generally refuse to play along, that means to get to the 25%, the local remaining bondholders (59 bn) get marked down as much as 45%.

Given that arrangement, what would you want to be paid on bonds in a country that is in a austerity induced depression, and now trapped into bank failures.  15-17% makes sense by those rules. If the rules of engagement change, then 17% on Portuguese bonds might be a bargain. Or since retail investors really don’t have access to Portuguese bonds, perhaps Portugal Telecom (PT) can be utilized.  Unfortunately the Trioka seems committed to the strangulation path, more debt, more impoverishment,  and more subordination.

But should things change, I have PT on my screen.  PT is actually a one-third Brazilian telecom, the common denominator being Portuguese speaking. The company has seen a decline in subscribers in the Portuguese Depression,  but sales (because of Brazil)  and EBITDA are chugging along.   With the stock around five bucks,  PT is almost a stub, meaning small market cap and big debt.  That makes it speculative, but since there is a legitimate franchise here’, potentially very rewarding for shareholders. My entry would be below book value which is 4.75 which would equate to 5.5 EBITDA. The caveat here is only if the Troika steps up to the losses they’ve taken on European debt, which would have the effect of placing the impact more on Germany, France, even the US and Japan (via the IMF).

   







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