Debts Come Home To Roost for Socrates
"Crito, we owe a rooster to Asclepius. Please, don't forget to pay the debt."
According to Plato, these were the last words of the Greek philosopher Socrates, following his decision to drink poison rather than try and pay off the guards and escape from prison.
His namesake, Jose Socrates, who resigned as prime minister of Portugal Wednesday night following the loss of a vote on his austerity measures will have a similar message for his successor.
Unfortunately, while Greek gods might accept a rooster or two for your soul, the new gods of the bond market are demanding huge interest payments on billions of euros of debt.
This is the poisoned chalice that Socrates will be leaving for his successor, who is likely to come from the conservative PSD party, adding to the dominance of the European political scene by conservative, right-wing governments.
The big question is what the new Portuguese government, which is likely to take office following a general election in June, does about the perilous position of its finances when taking power.
Barclays Capital’s Laurent Fransolet said it is likely that Portugal will have to ask the EU for help, believes this will probably come once a replacement to Socrates is found.
“The timing of any program will depend, to a large extent, on the funding needs and the cash position of the Portuguese treasury,” Fransolet said in a research note.
“Should the treasury have sufficient cash or manage to get a credit line/bridge loan to meet funding needs through June, it would seem reasonable to wait for the new government to negotiate the macroeconomic and financial conditions with the EU/IMF,” Fransolet said.
The other option would be the Portuguese president negotiating with the EU and IMF while at the same time trying to deal with Socrates and the current opposition, a situation that would add to investor uncertainty and will probably be something all parties would rather avoid.
Fransolet said he believes talks with the EU will focus on structural reforms “At the core of Portugal's economic troubles is its low productivity growth," he said.
"Increasing competitiveness and flexibility in highly the regulated product, services, and labour markets is needed for higher investment and growth; and higher growth is the sine qua non to place the debt/GDP on a downward trajectory.”
With uncertainty high, Fransolet said he expects Portuguese yields to remain high or rise in the near to medium term.
But he is confident there will not be a default.
“The Greek and Irish experiences show that these uncertainties eventually will be resolved and a near-term default is very unlikely," he said.
"But in the near term, they are likely to weigh on the bond market, especially in the context of very thin liquidity - any liquidation flow is likely to have a disproportionate impact on prices.”
Socrates, the outgoing Portuguese prime minister, said the timing of his government’s collapse could not have come at a worse time.
The man or woman who picks up his poisoned chalice may end up agreeing with him.