Bonds News

Portugal risk premiums leap to euro lifetime highs

LISBON, April 27 (Reuters) - Portuguese bond spreads soared to euro lifetime highs on Tuesday as investors homed in on the country as the next weak link in the euro zone after Greece.

The premium demanded by investors to hold Portuguese bonds compared with benchmark German Bunds jumped to 278 basis points, up from around 230 a day earlier, on fears that contagion from debt-stricken Greece would intensify until Athens is bailed out.

Portugal’s debt burden at about 75 percent of gross domestic product is much lower than Greece’s, which reached around 120 percent last year, reflected by the Greek spread over Bunds now heading towards a prohibitive 700 basis points.

But analysts are also beginning to focus on Portugal’s private sector debts, which are higher than those in Greece.

“From a quality perspective this is a different story still (to Greece), but from a market perspective we see some momentum that Portugal is seen as the next country in the line of fire,” said David Schnautz, bond analyst at Commerzbank in Frankfurt.

“It is a small country, the government debt is fairly OK but you get on top of that higher debt levels in the private sector, so this is something which the focus is turning to. And if you are in a kind of panic mode, it makes you vulnerable obviously.”

Peripheral euro zone markets suffered on Tuesday as Greek borrowing costs soared again after Germany’s junior coalition party said Berlin was not certain to put its weight behind a financial rescue. [ID:nLDE63P0LU]

Portugal’s credit default swaps to insure government debt against default reached record highs, rising to 349 basis points -- above Latvia’s levels -- from 311 on Monday.

Portuguese banks were hard hit too, with shares in the country's largest private bank, Millennium bcp BCP.LS down 3.7 percent and the Lisbon PSI20 .PSI20 stock index sliding 2.5 percent.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Portugal and Greece - Key economics indicators and CDS prices, please click on Comparison of debt maturity profiles, click on ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

The minority Socialist government has promised to reduce the budget deficit to below 3 percent of GDP by 2013, from 9.4 percent last year, by freezing civil servants’ pay, raising tax on high earners and eliminating tax exemptions.

On Monday, Foreign Minister Luis Amado said Portugal’s situation was “not quite comparable” with the crisis in Greece, which racked up a budget deficit of 13.6 percent of GDP last year.

Amado said the government would do whatever it took to avoid suffering the same fate as Greece which has pleaded for the activation of EU/IMF aid.

But there have been concerns that the government could struggle to pass further austerity measures, if pushed to do so, in parliament because it relies on opposition support.


As in Greece, the Portuguese government faces popular opposition to its austerity measures.

Public transport workers went on strike on Tuesday, stranding commuters and adding to escalating protests. [ID:nLDE63Q1F9]

A major concern for investors is that economic growth will prove too anaemic to eat into Portugal’s public and private debt levels. Portugal was one of the euro zone’s slowest growing economies in recent years.

“Markets are looking at all of the country’s debt and trying to understand how the country can overcome this situation,” said Filipe Silva, fixed income portfolio manager at Banco Carregosa, adding that liquidity was drying up for Portuguese bonds.

“If Portugal carried out the debt issues it did 15 days ago, it would pay more,” he said.

But its requirement is less than that of Greece.

Lisbon has already issued about 9 billion euros out of total planned bond issuance for 2010 of up to 22 billion euros whereas Athens’ total borrowing need in 2010 is 53.2 billion euros.

Schnautz from Commerzbank said Portugal has had decent access to debt markets so far this year and has only large redemption looming, on May 20 of 5.3 billion euros.

Greece must refinance an 8.5 billion euro bond the day before.

Schnautz doubted Portugal would have any difficulties at raising finance or redeeming debt.

The fact that Portugal’s IGCP debt agency has started to buy back debt in recent months could help Portugal as well by “smoothing out the redemption profile for this year and next,” he said. (Additional reporting by Shrikesh Laxmidas and Sergio Goncalves in Lisbon, Sujata Rao in London, editing by Mike Peacock)