Concerns that Greece’s delay in striking a deal with private creditors could infect other European economies brought unwelcome attention to Portugal, where borrowing costs Monday pushed into euro-era highs.
Other euro nations that have been linked to such contagion fears–such as Italy and Spain–were comparatively insulated, in a large part due to inexpensive cash pumped into the financial system from the European Central Bank.
The market for trading in Portuguese government bonds has stalled, with buyers and sellers of the debt limited, and the bid and offer prices traders see very far apart.
Pressure on Portuguese bond yields has been unrelenting in the past two weeks, with the closely watched 10-year bond yield rising more than four percentage points in that time to 16.4%.
“Portugal is seen as the case closest to Greece,” one sovereign debt trader said.
The five-year Portuguese government bond yield was at a euro-era record of 21.9%, while the yield on the 10-year bond at around 16.4%, more than full percentage point higher from the close Friday, according to data from Tradeweb.
The Greek government and private creditors have been unable to agree on terms needed to cut around EUR100 billion ($132.2 billion) from the country’s EUR350 billion debt. The shape of the agreement could be seen as a template for other insolvent countries.
Italy and Spain were seen to have problems with liquidity, as opposed to solvency. The ECB’s long-term financing operation in December addressed the matter, helping Italian and Spanish bond yields to remain more stable over the past couple of weeks despite uncertainty surrounding the Greek talks.
As far as Ireland, market perception has become much more positive in recent weeks. Prospects for solid economic growth, as well as its government meeting the targets stipulated in the country’s international bailout requested in late 2010, have helped push Irish borrowing costs down.
“While it is hard to overstate the soothing effect that last December’s three-year [ECB liquidity] had on many euro-government bond markets, it has not appeared sufficient to help Portugal where solvency, rather than merely liquidity, is seen by many to be at issue,” said ICAP strategist Chris Clark.
Portugal currently has no need to tap capital markets, having secured an international rescue package in 2011. But the country might need another bailout next year if it can’t regain enough market access to repay EUR9 billion in debt falling due in September 2013.
“Portugal remains the target of speculation that it’s next in line for a bailout,” said TD Securities rate analysts in a note.
Portugal’s bond-yield climb started midmonth after a Standard and Poor’s Corp. downgrade left the country’s debt rated “junk,” forcing some investors to sell their bond holdings.
Financial derivatives used by some to hedge their exposure to Portugal were also near records.
Portuguese five-year credit default swaps–derivatives that function like a default insurance contract for debt–were being quoted 39.5 points up front, according to data provider Markit. This means it costs $3.95 million at the start of the contract, plus $500,000 a year, to cover $10 million of debt for five years.
While up-front fees for CDS contracts aren’t unusual, traders quoting them in such a way is more rare, and something reserved for particularly risky investments.
CDS are derivatives that function like a default insurance contract for debt. If a borrower defaults, sellers compensate buyers.
Source: The Wall Street Journal
