A bridge to nowhere

There’s been a lot of talk over the last couple of days about Portugal getting bridge loans from somewhere (the European Commission, bilateral loans, the ECB) to hold them over until a new government comes to power.

If the objective is to deal with the sovereign debt crisis, such a solution would really be the worst of both worlds.

Not only would this small bailout have to be condition-free (since there is no government to enact or negotiate the conditions) but it would be nothing more than a precursor to a larger bailout to be negotiated with the new government. Neither of these bailouts will solve anything (as we pointed out in our Portugal paper); the country is basically insolvent and uncompetitive within the eurozone and beyond.

Regardless, no one seems to have any idea where a condition free loan would actually come from. As FT Alphaville points out, EFSM, IMF and even bilateral loans come with conditions (although we agree that the latter is currently the most likely option). The ECB has been eerily silent during the back and forth on this issue, suggesting that it is strongly opposed to expanding its government bond buying to fund Portugal (although we already knew that).

Oh, and just for good measure the caretaker government continues its line of denying that any talks with the EU over short term loans, or otherwise, exist.

Meanwhile, back at the fort, Portugal held another short term bond auction, which raised €1bn but at 5.9% for a one year loan (at that interest rate you could get a €70bn bailout from the EU/IMF). To add insult to injury Portuguese banks announced they would stop buying Portuguese government bonds (because even they have accepted that the debt will be restructured). In case you were wondering, it looks like the Portuguese social security fund bought most of the debt on offer today, meaning that when it gets restructured a large chunk of the populations’ retirement capital will be wiped out.

Clearly, a bridge doesn’t help if you’ve already sunk.