Commentary: The Sobering Truth About Portugal

Portugal's situation may resemble Ireland

Perhaps Portugals' Prime Minister should read Shakespeare's Macbeth

If Portugal's ability to generate headlines saying it's had a "strong" bond auction is startling, the effect it's having on world markets is almost unbelievable.

lisbon portugal
Ilan Arad | Getty Images
lisbon portugal

Certainly Europe surged today, with giant Spanish banks Santander and BBVA leading the charge—in their wake the big French and German banks most exposed to peripheral debt Societe Generale and BNP Paribas . The cost of insuring European bank debt through credit default swaps also dived today.

But let's just take a reality check. This isn't optimism. Surely the baseline is that traders were positioned for bad news. This is short covering. Don't forget Europe's banks did not rally with the market at the end of last year. In fact, they're still down 10 percent on July.

So, Portugal sold 1.2 billion euros of debt ($1.61 billion). Big deal. What does that prove? Surely in the context of sovereign debt, the amount is tiny. Moreover, Lisbon won't tell us who bought the paper.

In the wake of the rumor that it 'privately' placed a bond over the weekend, we can assume its government is working hard to make friends and pull strings behind closed doors. As one London trader remarked to me, "much like the banks ran around in 2007 and 2008 trying to borrow money from anyone willing to lend."

True, the Euro is rallying amid talk of option-related demand. But when details of the Portuguese auction actually broke at 6am ET, the Single Currency fell. Hardly a sign that trading floors in Europe thought it was an instant game changer!

It's also true that the extra the market demands to hold PIIGS' sovereign debt over benchmark German bunds is down again today. But we don't know how much the European Central Bankhas been buying in the market today. Nor the "bang" that one committed buyer could get for their "buck" in strained markets.

Before Angela Merkel met with the IMF today, she indicated Germany might be willing to revise Europe's trillion-dollar rescue funds—make them bigger, perhaps allow them to also directly buy bonds in the secondary market. But in the meantime, it will be all too easy for investors to fall back into that pit of despair.

I keep hearing that the problems in Europe remain structural. In short, there wasn't much optimism when I called round. Except for this: how Portugal's situation may resemble Ireland.

Remember, Ireland finally did a deal with the IMF on December 15. But as Simon Derrick at BNY Mellon points out, there was a period in the run-up to that bailout when spreads eased as the market anticipated a deal.

If Dublin had done one with the IMF in mid-October, it could have shut down its own contagion and locked-in at far lower borrowing costs. But instead, Irish spreads shot uponce the stubbornness of its politicians became apparent.

Perhaps Portugal's Prime Minister should read a bit of William Shakespeare's Macbeth tonight:"If it were done when 'tis done, then 'twere well it were done quickly."