STRATFOR has identified four European countries — Portugal, Belgium, Spain and Austria — that are very likely to need EU bailouts in 2011. We now examine one of the factors likely to cause a financial break in two of these states, Portugal and Belgium.
Update April 8, 2011: In February STRATFOR forecast that Portugal would need a bailout most likely between March 18 and June 15. With Lisbon officially requesting a bailout on April 8, that forecast has come true. We also identified that Belgium was facing serious financing hurdles by April 14, although financial markets have not pressured the country so far. However, with Portugal out of the picture, and with Spain resisting contagion effect with reassuring austerity measures and bank restructuring plans, Belgium may be the next target of investor skepticism. Especially as it continues to be without a government due to a serious ethnic political conflict. Modern nation-states typically raise funds from the bond market. The government announces how much money it is attempting to raise and interested investors bid competitively, indicating how much they would demand in interest. The government takes the least expensive bids. The investors provide the money at that time, and the government agrees to pay back the bond in full at the date of maturity, while making interest payments in the intervening period. The investors may then take that agreement, or bond, and sell it to others if they choose. The important part of this for Portugal and Belgium in 2011 is the date of maturity. That date is announced during the auction itself so that all players understand exactly what the offer entails. Normally, states spread out their maturity dates so that giant masses of debt do not come due at the same time. This is the same principle as making sure your mortgage, car payment and credit card bill do not all fall on the same day. However, the euro's adoption in 1999 ushered in a period of robust economic growth and ample liquidity. Perceptions of financial risk changed because refinancing was cheap and easy. Maturity dates became less of an issue. In the aftermath of the 2008 financial crisis, however, many governments face mammoth debt loads too expensive to sustain and suddenly those maturity dates — for some — are everything. Over the next few months, Belgium and especially Portugal face a number of dates on which they must pay out very large sums of cash. Portugal must come up with cash equivalent to 1.9, 2.7 and 2.9 percent of gross domestic product (GDP) on March 18, April 15 and June 15, respectively. Any one of those volumes could be sufficient to force Portugal into some sort of conservatorship should investors balk. Belgium faces similar crunches. Between March 17 and April 14, a series of maturity dates will force it to pay out the equivalent of 5.3 percent of GDP. It also faces a 3.1-percent-of-GDP payment on Sept. 28. All told, between the time of this writing and the end of September, Portugal must produce 17.9 billion euros and Belgium 44.0 billion euros, most of which is front-loaded in the next four months. It hardly ends there. Should the pair squeeze through 2011, they actually face bigger debt-maturity crunches in 2012. Bailouts loom large in the future of both states. And these two states are not alone. All of the EU states facing financial stress have their own dates to worry about. At first glance, it may seem that some of them — specifically France and Spain — are for the most part in the clear. In reality, they face an almost constant parade of lower-threshold debt-maturity dates. (Note that in the adjacent graphic, STRATFOR opted to only highlight debt maturity events in which 1.0 percent of GDP or more came due in order to better highlight when states face high-stress financial events.) In France's case, it amounts to roughly 0.5 percent of GDP being due every other week. This is good in that there is no drop-dead date in which a mass of money must be produced, but bad in that their systems are under a constant, though low, level of financial stress. But no one, at the moment, is in as much of a dilemma as Belgium and Portugal are. A keen eye will note that Italy, by some measures, is in a worse position than Belgium or Portugal, but STRATFOR does not see Italy as being ripe for a bailout in 2011. While Italy has a debt load larger than that of any other European state, the Italian economy is a multitrillion-euro entity with a highly developed and varied export sector that is home to one of the largest banking sectors in the world. Furthermore, Rome has decades of experience carrying a massive debt burden and has developed several creative debt-management tricks. As a result, investors have not yet expressed concern that Italy cannot shoulder its debt load — borrowing costs have risen for Italy, but nothing like the more than doubling of rates that Portugal has seen. Concern for Italy is unlikely until a smaller Western European economy, such as Belgium's, first enters financial receivership. Only at that point is it likely that investors would become concerned with established Western European economies, as opposed to peripheral economies like Portugal's, Ireland's and Greece's. And even then, Austria is a more likely second target than Italy. Luckily for Portugal and Belgium there are some mitigating factors. First, government financial officials in Portugal and Belgium are not stupid — they know these maturity dates are coming and have been attempting to front-load some new bond issuances to avoid having to come up with a huge amount of money all at once. The problem is that investors know that, too, and most are demanding higher returns and shorter maturities. Most of the money that the two states have raised this year has been with bonds of a maturity of 12 months or less. Addressing their short-term problem is simply creating an even bigger mid-term problem. Second, the European Central Bank (ECB) has been providing some indirect assistance by purchasing the pre-existing government debt of troubled states. By absorbing some of the debt already circulating, the ECB both boosts capital availability across the troubled economy, which helps those states in their overall recovery, and also encourages entities that normally participate in eurozone government debt auctions to continue to do so, since they can always turn around and re-sell those bonds to the ECB. Third, there is a bailout fund in place, the European Financial Stability Facility, that can handle not only Portugal and Belgium but also Spain and Austria. While the fund's mere existence proved insufficient to stop an Irish bailout, it has breathed at least some confidence back into the market. The very existence of a safety net makes it somewhat less likely that one will be needed. In theory, at least.