Wednesday 21 March 2018

Noose tightens on Portugal as bond yields rise

Donal O'Donovan

PORTUGAL'S cost of borrowing hit a fresh high yesterday as markets reacted to the failure of European leaders on Friday to agree a comprehensive deal to end the debt crisis.

The lack of progress on a political fix meant the bond market would remain fragile for a number of years, said influential credit analyst Gary Jenkins of Evolution Securities.

In a damning assessment of last week's summit, he said bailouts and restructurings were set to become a common theme of the market.

For now, the focus is on Portugal. It is widely seen as the next candidate to be forced into a bailout, joining Ireland and Greece in depending on EU and IMF loans to fund government spending.

In contrast, Spain and Italy, once regarded among the weakest credits in Europe, performed well. Italy plans to sell €21.5bn of debt this week even as bond yields suggest Portugal will become the third country to need aid.

At the same time the world's biggest bond investors PIMCO said it believed Spain had taken steps to build a "firewall" between its reputation as a borrower and Portugal's debt woes.

Spain was cutting its deficit and retooling its economy, said Andrew Bosomworth, a money manager at PIMCO.

The yield, or cost of borrowing, on Portugal's 10-year government bonds hit a euro-era record of 7.94pc as investors voted with their feet and sold into a falling market.

Yesterday, the ECB said it finally stepped back into the market and purchased €432m of government bonds last week. The news did nothing to halt the rout for Portugal

The difference in yield between Portuguese and German bunds also reached a euro-era high of 4.63pc. The difference between German and other countries' yields is seen as a key measure of risk.

The yield on Portugal's five-year bonds is even higher, showing investors see a danger of suffering losses sooner rather than later.

Ratings agency Standard & Poor's warned it could cut Portugal's debt rating this week.

Portugal is locked in a political crisis that means there may be no one willing or able to negotiate a bailout deal.

Yesterday, Portuguese President Anibal Cavaco Silva said he may call early elections for June.


Portugal has large debt repayments falling due in April and June. The country may have funds to meet the €4.5bn April repayment but will have to raise fresh cash from either private investors or a bailout by June.

Yesterday's yield shows the private sector option is shut.

Meanwhile, Irish government bond yields remained close to 10pc. In the markets, debate was raging over how to interpret Agriculture Minister Simon Coveney's weekend remarks on burden sharing with banks' bondholders.

Ryan McGrath, a trader with Dublin-based Dolmen Securities, said the comments were aimed at softening up the ECB to agree a medium-term funding scheme for the Irish banks.

The ECB is opposed to burden sharing and Mr McGrath believes a deal on bank funding will be the price Ireland extracts for taking the idea of losses for senior bondholders off the agenda. If true, it means a potential boost in prices for bank bonds trading as low as 50c in the euro on 'haircut' concerns.

Irish Independent

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