CDS chart of the day, Portugal edition
Many thanks to my colleague Eric Burroughs for sending over this chart, showing how Portugal’s CDS curve has evolved over the course of this year:
The black curve is how Portugal looked in April: a pretty standard upward-sloping curve, with default more likely the longer you go out.
By June, however, with the onset of the Greece crisis, things looked very different. (This is the green curve.) Obviously default probabilities were higher across the board. But they were highest at the short end of the curve: 6 months to a year out. If Portugal could make it that far, markets were saying, then it would become steadily less likely to default thereafter.
Today, with the red curve, it’s very different yet again. The contrast from just a few months ago is striking: while the 1-year CDS showed the highest default probability back then, today it’s the lowest. The EU bailout of Ireland confirms that Portugal will probably not be allowed to default any time soon.
But then look at where Portugal’s CDS curve goes after that: straight up, to the point at which the country is now considered more likely to default at 3 years out, and on from there.
The implication is clear: any bailout now only serves to make a future default more likely.
Which is not, I’m pretty sure, the message that the EU is really intending to send.