The notion of a perfect storm is a tired cliché but in Portugal’s case, its use has rarely been more apt. Our view is that the market is underestimating the risks surrounding Portuguese debt roll-over and planned exit from the Troika programme in 2014.
According to Portugal’s original bailout terms, the country is supposed to exit Troika stewardship and return to the financial markets next year. As we have repeatedly argued this outcome is very unlikely. There is, however, a much more worrying factor in Portugal.
Portugal’s accumulated sovereign debt together with its contingent liabilities to the banking system, state-owned companies and PPIs already represent a significant obstacle to progress. Portugal’s total stock of private and public debt is substantial at more than 300% of GDP. But when this is coupled with the stock of private debt the country’s challenges look insurmountable. Some serious debt restructuring is now inevitable. The only questions are when and how.
In particular, the market is currently overly focused on the traditional nexus between the sovereign and banks in need of recapitalisation, but the real nasty surprise in Portugal may be a wave of corporate defaults in 2014 as debt rolls over to much higher rates.
In this report, we provide a break-down of the private and public sector debt rollover schedule for 2014 and provide ideas on how to play the coming debt crisis in Portugal.
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