Portuguese bond yields posted their biggest weekly rise in more than two and a half years on Friday, ending a torrid week that has revived memories of the 2011-2012 euro debt crisis.
Rattled by worries about the health of European banks and the world economy, investors have singled Portugal out as a weak link in the euro zone.
The country’s 10-year bond yields moved in a range of 143 basis points this week amid concern that lawmakers’ plans to speed up the reversal of state salary cuts and increase indirect taxes will hit its reform programme. That’s the largest weekly yield swing since July 2013, when Portugal’s two governing parties were split over the budget measures required to complete its bailout.
Yields on its 10-year government bond clawed back to 3.63 per cent, having struck 4.38 per cent on Thursday – its highest level since April 2014.
Portugal has borne the brunt of this week’s selloff in the securities of Europe’s higher debt and deficit nations.
While minister of the presidency Maria Marques said Thursday that the increase in Portuguese bond yields isn’t linked to the discussion on the budget, the jump in 10-year yields over the past week was six times greater than that on the securities of neighbouring Spain.
“When you look at Portugal it’s a completely different kettle of fish” to Italy or Spain, said Peter Schaffrik, head of European rates strategy at Royal Bank of Canada in London. “It’s easy to see why trouble is brewing. In Portugal, on top of that, you have a government that’s not delivering what the market wants to see.”
Insuring debt
The cost of insuring Lisbon’s debt was also at its most expensive since October 2013, according to data provider Markit.
There is also concern that Portugal could lose its last remaining investment grade rating, which could lead to it being jettisoned from the European Central Bank’s asset purchase programme.
“There are question marks about whether the credit rating will withstand what’s going on in the current environment and the implications of a downgrade for Portugal remaining in the ECB’s asset-purchase program,” said Chris Scicluna, head of research at Daiwa Capital Markets.
DBRS, the only major rating agency which ranks Portugal as investment grade, said on Friday that it was concerned by a recent rise in its bond yields. – (Reuters/ Bloomberg)
