Thursday 7 April 2011

Sovereign spreads - then versus now

Here is an interesting comparison of the pace of the recent Eurozone sovereign crisis with our own debt crisis of the 1890s. Portuguese troubles started in April 1890 and culminated in January 1892 (21 months). The subprime crisis spread to Europe around October 2008 and by May 2010 Greece had appealed to foreign aid (20 months). There is a also striking similarity between the levels of historical Portuguese spreads up to and after the January 1892 default (green dashed line) and the Greek bailout (blue dashed). By most historical precedent, Greece is clearly bust and will need a debt rescheduling. How about Portugal? Long spreads are still markedly lower than the comparators, although that may be just the time lag from contagion from Greece and Ireland. As we don't have the benefit of the hindsight of the next months this invites speculation. But if Portugal follows the same path of Greece and Ireland, I would bet that we would witness a similar pattern, perhaps more accelerated. Plus ça change?

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