Tuesday 12 December 2017

Portugal contagion raises fears for Irish bond market return

Nick Webb

Nick Webb

While Ireland may have -- through sleight of hand -- got a bond issue away last week, Portuguese credit-default swaps rose to a record level, amid concern the government may seek to copy a proposed Greek deal for private investors to take losses on their bondholdings.

Contagion remains a major threat to any Irish recovery and if Portugal hits the skids, the bond markets may turn against Ireland again -- given that we are the only other country apart from Portugal and Greece in an IMF programme.

This could cause major issues for Ireland's plans to return to the markets later this year.

Credit-default swaps soared late last week, with the price of insuring Portuguese five-year bonds now indicating a 70 per cent chance the Iberian government will default during that time.

A Greek accord with private bondholders that would prompt writedowns of more than 50 per cent is "very close," the European Union's Economic and Monetary Affairs Commissioner Olli Rehn said last week at the World Economic Forum held at Davos, Switzerland.

Portugal received a €78bn bailout from the IMF/EU soon after Ireland's bailout. European Commission figures suggest that Portugal probably had public debt representing 101.6 per cent of GDP last year, which is the the fourth highest in the EU.

"It appears that Portugal may have crossed the Rubicon in the eyes of the market," according to Gary Jenkins, the director of independent credit firm Swordfish Research, based in London.

"A negotiated settlement in Greece might become a template for Portugal in how to deal with their debt, which wouldn't be good news for investors."

(Additional reporting by Bloomberg)

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