Debt woes build for Portugal, Ireland

Last week the Swiss National Bank announced a decision that it would cease accepting Irish and Portuguese bonds as collateral.

The Financial Times reported: "The Swiss National Bank confirmed on Friday that it had stopped accepting Portuguese government securities as collateral for repurchase (repo) agreements, adding Lisbon to Dublin among the eurozone governments on its ineligible list. The decision to exclude both countries follows steep downgrades of Portuguese and Irish debt and was based on the Swiss central bank’s strict, but highly transparent, acceptance criteria."

This disclosure could not have come at a worse time: with Portugal slated to hold another major bond auction this week (following the earlier abysmal 6-month Bill auction), there is actual risk the entire affair could be a failure.

Subsequently, Reuters reports that “Portugal is in the process of making a private placement of bonds, without announcing details on size or the buyer.” The obvious guess would be China and size is about €1 billion (recall China told Spain it would buy about €6 billion from the three PIIGs).

This would be a major change in the way government bonds are sold to investors as it bypasses the traditional Dutch approach entirely, as this is basically a 144A transaction (large sophisticated investors only).

Governments are clearly pulling out all stops to remain liquid in an attempt to kick the inevitable can of default down the road. We'll likely see several troubled countries leave the Union. The party leading in the polls of the Irish election (March 25) has vowed as much in their political platform. This risk will likely keep the U.S. dollar strong relative to the euro and put some pressure on commodity price, like we saw last week.