Business World

Tuesday 12 December 2017

Markets pile pressure on Portugal and Spain as EU's leaders meet

Donal O'Donovan

PRESSURE continues to build on Portugal and Spain in the bond markets, even as political leaders from across Europe met in Helsinki yesterday to discuss the economic crisis.

The yield, or interest, on Portugal's 10-year government bonds has now been above 7pc for 20 consecutive days.

It is also now just as expensive for the country to borrow over five years as over 10 -- which represents a dire assessment of medium-term risk.

Yesterday, the yield on Portugal's 10-year debt pushed against 7.5pc, the highest level since the country joined the euro.

It means that there is a growing expectation that Portugal will be forced to accept a European Union and International Monetary Fund (IMF) rescue deal similar to Ireland's.

A yield above 7pc means Portugal cannot afford to borrow over the longer term in the private sector debt market. However, in the country's favour is a relatively modest funding need in the shorter term.

Portugal has so far sold €5.9bn of the €20bn bonds that it expected to sell this year. That should be enough to meet its funding requirement until June.

It announced plans yesterday to sell up to €1bn of two-year bonds next week.

That short-term debt is cheaper and may well be placed with domestic banks. However, with a general interest rate rise on the cards and the eurozone at sixes and sevens, many investors will now prefer to stay out of even Portugal's short-term borrowings. It looks like a one-way street.

Also, ratings agency Fitch said last night that it had changed its outlook for Spanish government debt from stable to negative. This means that it expects the country's credit worthiness to deteriorate.

Fitch kept its long-term foreign and local-currency-issuer default ratings for Spain unchanged at AA+.

The ratings agency said it had placed Spain on the negative outlook after looking at the balance of risks around the strength and sustainability of economic recovery.

It added that the ultimate cost of restructuring Spain's savings banks and the impact of new budgetary targets were factors in the decision.

Despite the move, most analysts expect Spain to be able to borrow in the open markets this year and into the future, although costs are creeping up on its debt.

Irish Independent

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