MacroScope

Banking on a Portuguese bailout?

November 30, 2010

portgualprotest.jpgReuters polls of economists over the last few weeks have come up with some pretty firm conclusions about both Ireland and Portugal needing a bailout from the European Union.

Portuguese 10-year government bond yields have hovered stubbornly above 7 percent since the Irish bailout announcement, hitting a euro-lifetime high and giving ammunition to those who say Lisbon will be forced into a bailout.

And of those who hold that view, it’s clear that bank economists have been most vocal in expecting Ireland and Portugal to seek outside help.

Take last week’s poll in which economists said Portugal would follow Ireland in applying for EU funds. Bank-based economists who expected a Portuguese bailout outnumbered those who didn’t almost three-to-one. For non-bank economists – those working at research houses, brokers and wealth management firms – the margin was only two-to-one.

This division was even more marked in the Irish bailout poll we ran three weeks ago. Bank-based economists expecting an Irish bailout outnumbered those who didn’t more than two-to-one. Our sample of non-bank economists were split almost evenly on the subject.

Interestingly, market makers and primary dealers – or banks mandated by government debt agencies to deal their new government bond issues – were staunchest in expecting Irish and Portuguese bailouts.

Of the seven economists polled by Reuters who work for primary dealers of Portuguese debt, six said Lisbon would need to apply for a bailout. For analysts representing primary dealers of Irish debt, four out of five said a bailout was imminent.

While such pessimism from banks tasked with creating a market for Portuguese and Irish bonds might be surprising, it wouldn’t be the first time we’ve seen a correlation between economists’ forecasts and their employers’ status as market makers.

Earlier this month, we noted how the high end of forecasts for the Federal Reserve’s $600 billion renewal of its quantitative easing programme was driven by primary dealers of U.S. Treasuries – the banks who would be selling bonds back to the Fed at a good price back under the QE scheme.

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