GLOBAL

The most important Portuguese bond auction ever had been shaping up as another bloodbath.

On one side of the fight there was Portugal, with its perpetually stalled economy, sizable budget deficit and insistence that it didn’t need help from European allies or the International Monetary Fund. In its corner by default stood the European Central Bank, the underfinanced buyer of last resort of bonds sold by struggling European issuers at unaffordable interest rates.

Arrayed against them was the rest of the financial world, too busy speculating on commodities to care about Portugal’s plight, except for the hedge funds enthusiastically betting against European banks. As with most financial standoffs matching desperation against indifference, indifference seemed likely to win out.

China, Japan Pitch In
And then the cavalry rode over the horizon, Asian cavalry bearing bags of money. The Chinese chose to trade some of their dollars for political capital, scooping upsome of Lisbon’s IOUs in a private placement. Japan also expressed interest in chipping in.

The net result was a marginally lower yield on ten-year bonds than Portugal had been forced to pay in November, shortly before Ireland drank from the poisoned bailout cup. At 6.7%, the interest rate was exactly double that on the ten-year US Treasuries auctioned off a few hours later. Such are the rewards of German-mandated austerity that forced Lisbon to cut its budget deficit from 9.3% of gross domestic product in 2009 to 7.3% last year and 4.6% in 2011. In contrast, the US is merrily overspending by about 9% of GDP, with no letup in sight thanks to the recent extension of the tax cuts. Such pump priming is stimulating growth of around 3% in the US, while Portugal flirts with renewed recession.

Perhaps the best news for Portugal is that its fiscal overlords in Berlin have been making slightly more encouraging noises of late about increasing the scope of European aid. Forcing spendthrift allies out of the Eurozone may not prove the vote winner it once seemed, now that Germany’s economy is doing much better.

Trouble Spots Emerging
The resilience of German stocks and gains by US equities must be tempting investors to redeploy some of the profits earned last year in emerging markets. The Indonesian and Indian market averages are down 5% to 6% in the last week or so as rising inflation stokes worries about rate hikes.

But at least investors in those countries are not rioting like their counterparts in Bangladesh, where banks heavily invested in local stocks have yet to hit upon an optimal exit strategy. Here’s hoping US banks sitting on Treasury bonds prove luckier.

This Week in Global
Latin American bonds may well prove better bets, as could the London-listed trusts buying them for yield and delivering capital gains to boot from the region’s equity bull markets. Andrew McHattie has the lowdown. Yiannis Mostrous, meanwhile, explains why Wynn Macau (Hong Kong:1128) is an even better bet than the US-traded stock of its parent company.

Michael Brush writes that this could be Japan’s year at long last, with investors indifferent, valuations low, companies lean and mean and the Chinese and US export markets growing. This would be as good a year as any for Japan’s luck to change, and perhaps a better year than most.  

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