How Portugal burned 1.3 billion EUR in 2 months

Today I couldn’t believe my eyes when I saw the price graph of the 30 year Portuguese Government debt since it was issued on Jan 13th. PGB 2045

The buyers have seen their investment rise 42% in only 2 months, that’s an annualized return of 720%!! When Jose & Maria put their savings on the bank, they get an annualized return of 1%. Dam, it feels good to work in Finance, thanks Draghi, we love you. Please keep printing more money, never mind exacerbating inequality. After all, everyone should know about these opportunities. If the fools Jose & Maria prefered investing in “safe” Espirito Santo commercial paper .. it’s their problem.

One question urges: Why would the Portuguese Government issue EUR 5.5 billion on Jan 13th (2 billion for 30 year notes + 3.5 billion for 10 year notes), knowing a QE program would be announced 1 week later (which would obviously drive down yields and make it much cheaper to borrow)? Why did they pay a 4.1% coupon when only 2 months later they are trading at 2.15%? That equates to roughly EUR 1.3 billion left on the table in 2 months, more taxpayer’s money completely wasted to the benefit of the elites. Why is no one asking questions to Maria Luisa Albuquerque? Why didn’t they invite Jose & Maria to the party by allowing small retail Portuguese investors to participate? And please don’t tell us that it was hard back then to predict the rates would go down… The SNB broke the peg with the EUR 2 days after we issued those bonds because they knew what was coming. The fact the bonds attracted a 2.5 bid-to-cover ratio also illustrates how mispriced the bonds were issued at (14 billion demand from investors for 5.5 billion supply). Anyone involved in the financial markets should know what was coming, specially insiders like our Treasury / Government. If they didn’t, then maybe step aside and make space for competent people (obviously people not affiliated with PS / PSD).

Follow me on Twitter @ricardo_afonso_


8 thoughts on “How Portugal burned 1.3 billion EUR in 2 months

  1. 1) Feels good to make “obvious” analysis in hindsight. If it is was so obvious im guessing you are a billionaire by now because you could have made ultra levered bets not only on portuguese debt but other sovereigns as well
    2) Yields were historically low for the republic and for other countries as well that issued 30 years notes at the same time so Portuguese MofF was not alone on this “obvious” move
    3) Portugal decided to repay in advance IMF loans that had higher interest rates
    4) many analysts predicted the rally would no longer have legs after the incredible run the market had before WE was announced (buy on the fact sell on the news)
    5) You dont know basic bond math


  2. 1) Not a billionaire, but doing ok
    2) Reinforces my point about how intertwined banking sector and governments are…
    3) Glad to hear that
    4) Why was demand so strong then (~€14 billion)? Why did the SNB break the peg?
    5) NPV of all annual coupons of 82mio EUR discounted @ 2.15% is 855mio (just on the PGB 2045). Then add the 2025, you’ll get to 1.3bn.


    1. thank you for your answer

      3) So how can you make a fair analysis of the cost/benefit of a decision without taking into consideration the opportunity cost/alternatives? Issuing this debt back in January allowed the Republic to receive approval from troika to repay higher interest loans to IMF at par. do you consider issuing lower interest bonds to pay higher interest loans at par bad management?
      4) Demand for .com stocks was very strong until the market crashed… what does that tell us? nothing. and SNB dropped the peg because it had serious losses and keeping the peg in an environment where the euro is falling could potentially bring SNB close to insolvency. No central bank in history managed to keep interest rate pegs for a long time… So what does that tell us? absolutely nothing besides that we already know in advance that pegs will be broken eventually and the more the market goes against the peg the higher the probability the peg will be broken.
      5) Dude, seriously, i dont understand your math regardless of what the final outcome of the calculations is (in favour or against your conclusions). First and foremost you cant take into account only coupons… what about notional? what about the differential between issuance and MtoM? Second and most importantly you need to learn what a swap spread is. All debt agencies manage interest rate risk and swaps have moved since January. Debt agencies are not retail investors where their “PnL” is linked to the absolute value of the price of bonds. Part, if not all, of the decline in 10 year swaps and 30yr swaps was captured because debt agencies, immunize all, or at least partially, their liabilities interest rate movements. having said that i’m pretty sure money was left “on the table” because the swap spreads have come down agreesively as well but the calculations are plain wrong, misleading and nobody has a harry potter wand to know exactly whats the perfect market timing and specifically in this situation the opportunity cost was paying higher interest rate loans… it was a no brainer to issue that debt regardless of what the market movement was afterwards.

      Sorry for the long email.


  3. Interesting your comment, I actually thought this weekend that you’d be in touch .. given recent market volatility. Fair enough, you have a point. But still, PGBs 45 are trading 5% above issue price, so I’d have waited a few more days to see if price drops below par. Couple more comments:

    1. Let’s see how things evolve going forward .. we’d expect volatility anyway along the way, so this is not the end of story.
    2. Regardless of how things evolve, I still think IGCP could have been sharper on their timing. You have to recognise timing was unfortunate

    I think this discussion will become futile anyway, there’s no way out for Portugal. Terrible demographics (great article on the Economist this week about that), huge debt burden, cultural misfit with core Europe, engrained corruption, EUR trapped, list goes on and on). I’d love to be optimistic but I think we both know how the story will end.



  4. Replying to John’s comments’ point #3:

    Portugal borrowed from the IMF, beetween 24/05/2011 and 24/04/2014, 22.942.000.000 SDR at an average rate of 1.15361 EUR.

    Portugal repaid in March 5.107.749.994 SDR at an average rate of 1.29356 EUR.

    That alone gives a sum of -714.847.108,21 EUR, therefore, a loss for Portugal. They just announced the repaiment of another 2bln€, therefore adding more losses into the calculation.

    As it’s obvious, Portugal is NOT paying par on the SRD positions repaid.

    Questions now are:
    1. Why the loss-making early repayment, is it politically-motivated?
    2. Would the IMF agreed with early repayment, if they were losing money?

    The SDRs are rated in basket of currencies – USD/EUR/JPY/GBP – and all points to a recovery of the EUR against the other currencies, mainly the USD (biggest weight on the SDR basket), looking at the forecasts that the IMF is currently making.

    P.S. – Calculations are needed in order to understand if this will be really a loss or a profit making event, as I didn’t calculated the ammount in interest that is not gonna be paid by the repayment of these SDR.



  5. One of my main points all along was that market timing isnt as obvious and easy to time as you were claiming, even with QE announcement. I guess the market demonstrated this much quicker than I thought.

    If Portugal, Europe or for that matter the developed world are doomed because of demographics and too much debt is a completely different discussion and not related with the post.

    Regarding Paul’s calculations… are you calculating the PnL of a foreing currency issue without taking into account fx hedges? Do you know if IGCP doesnt hedge currency risk? If they do the gains must be substantial since they would be short euro… come on… you need to be bit more technical.

    Again, I honestly dont know if the the debt decisions were good or bad I am just saying that if you guys want to make that assessment, the calculations you have done are worthy of a typical tabloid and not a technical blog like I think it is your goal.

    Liked by 1 person

  6. Won’t argue with you about technicalities, I can see you know what you’re talking about. Perhaps language was tabloid-like, but the point remains: Timing was terrible, large money left on the table, and retail investors should have been allowed to participate in the “party”. Appreciate you contributing to the discussion

    Liked by 1 person

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