Although Greece’s default restructuring of its bonds has temporarily relieved the pressure and paved the way for a new rescue package, it has also damaged the markets confidence in investing in PIIG bonds even further. On the one hand the euro authorities have broken some many promises that its hard to believe anything they say. Norway’s sovereign wealth fund has decided on investing in the PIIGS because after all the ECB was exempt from taking a hit during Greece’s restructuring.

The fund, under Norway’s finance ministry, voted against the Greek debt deal on the grounds that European institutions were exempted from losses and given “special” treatment. “It’s very important to create trust in the markets. To create trust you have to stick to the rules,” said director Yngve Slyngstad.

What happens if the same deal was extended to Portugal. Pimco’s Mohamed El-Erian is not so confident in private investors doing well out of a Portuguese restructuring  and said

Portugal will need a second rescue as the original package of €78bn (£65bn) falls short, setting off a political storm over EU rescue costs.

“Unfortunately, that is how it will be. It will make the financial markets nervous because they are worried about a participation of the private sector,” he told Der Spiegel over the weekend.

To put it in context

If the Greek haircut formula is ultimately extended to Portugal, private creditors can expect to lose everything. The EU and the International Monetary Fund already own most of the debt, reducing everybody else to cannon fodder status. Mr El-Erian said EU leaders are deluding themselves if they think they have solved Greece’s problems. “The Greek package is going to fall apart quickly. Bridges built to go nowhere can collapse at any time,” he said.

The IMF said in its latest report that Greece remains “accident prone” and may need further help and more debt haircuts if the economy “fails to respond rapidly enough to reforms”.

It warned that a “disorderly euro exit would be unavoidable” if the EU cuts off support. Such an outcome would threaten the IMF itself with unprecedented losses.

Source: Telegraph (Ambrose Evans-Pritchard)