Ireland and Portugal are set to exit their bailouts and jump straight into the ECB’s OMT program. This is not surprising. With sky-high debt-to-GDP ratios, they are unlikely to have true bond market access for years.
Both countries currently maintain debt ratios of over 100% with large current budget deficits. At the present rate, the debt ratios will continue increasing into the foreseeable future thereby reducing each country’s fundamental creditworthiness.
Both Portuguese and Irish bonds have rallied since July, but one should not read too much into this. The willingness of the ECB to turn on its magic money machine rather than an improvement in economic or fiscal conditions is the reason for the improvement in yields.
The EU is bifurcating into two zones, a welfare zone composed of the periphery that requires support and a rich zone composed of the Northern countries that pay for the welfare. The welfare countries will require ECB support for years. Draghi cannot end the OMT program, because periphery debt yields will go parabolic instantly. As such more and more bonds will be sold under the auspices of the program making it even less likely that it can end.
In the meantime, the FANG better keep their checkbooks handy.