Portugal May Get Little Relief From Greek Debt Deal: Euro Credit

Portugal May Get Little Relief From Greek Debt Deal
Commuters wait near the Terreiro do Paco ferry terminal as the sun sets in Lisbon. Photographer: Mario Proenca/Bloomberg

The Greek debt swap negotiations that may produce relief for Athens are fueling concerns in Lisbon where an agreement would make it more likely Portuguese investors would be next in line to accept a loss.

European leaders have said a Greek accord where investors take a 50 percent writedown in the face value of their bonds is unique and won’t be applied to other nations struggling to tame rising debts. Holders of Portuguese securities are skeptical, with the yield on the nation’s 10-year bonds rising today to a euro-era record of 16.45 percent.

“Portugal’s debt and lack of growth is very similar to Greece,” Yannick Naud, who manages $150 million at Glendevon King Asset Management, said in a Jan. 23 interview in London. “Its bonds are falling because it’s very obvious to everyone that if there’s a haircut for Greece, there might well be a haircut for Portugal too.”

EU chiefs arrive in Brussels today to put the finishing touches on a German-led deficit-control treaty and to endorse the statutes of a 500 billion-euro ($656 billion) rescue fund to be set up this year. Efforts to hold the 17-nation euro area together with bolstered fiscal rules and a stronger firewall are colliding with stalled progress in Greece.

‘Key’ Risk

Portuguese bonds have been the worst performers of the nine European Union countries downgraded by Standard & Poor’s on Jan. 13, when the company cut the nation’s credit rating to junk. The increase in borrowing costs is dimming prospects in Portugal’s ability to sell longer-term bonds in the public markets by the end of next year, as investors may be forced to endure writedowns before rescue funds from the EU run out in June 2014.

“Some type of private sector involvement for Portugal is a likely event and that is probably one of the key risks,” said Jim Cielinski, head of fixed income at Threadneedle Asset Management Ltd in an interview on Bloomberg Television today. “Portugal has been trading off quite markedly.”

The nation’s gross domestic product will contract 3 percent in 2012, the International Monetary Fund said in a December review of the Portuguese bailout plan.

“Portugal is likely to experience a sharp decline in GDP over the next few years as a response to fiscal tightening, well beyond the initial assumptions underlying the European Union-International Monetary Fund program,” Luigi Speranza, an economist at BNP Paribas SA, wrote in a Jan. 27 note to clients.

Markets Shut

“With markets still shut to Portugal, this implies the need for either additional public financing and/or restructuring of past debt. We think the former is the most likely option, but we cannot rule out the latter.”

Speranza estimates the Portuguese economy will shrink 5 percent this year and the country will face a 9 billion-euro funding shortfall at the end of 2013 unless it can sell debt.

Prime Minister Pedro Passos Coelho has said Portugal will adhere to targets set in the 78 billion-euro bailout agreed to last year. Should Portugal’s fiscal discipline fail to result in lower borrowing costs, international lenders may have to offer more support, he said at a Jan. 24 press conference in Lisbon after meeting Spanish Prime Minister Mariano Rajoy.

“If for external reasons that don’t have to do with the fulfillment of the program, Portugal or Ireland aren’t in a condition to return to market on the scheduled date, the IMF and the EU will maintain aid,” Passos Coelho said.

Debt Rising

The Portuguese program is “off to a good start,” Hossein Samiei, an adviser at the IMF’s European department, said on Jan. 21. The IMF’s board approved a 2.9 billion-euro disbursement from the aid program in December.

The European Commission forecasts debt will surpass 100 percent of GDP this year and total borrowing will peak at 106.8 percent in 2013, according to the government. Greece’s debt swap aims to trim its borrowing to 120 percent of GDP by 2020, which is set to approach 200 percent this year without the plan.

While it’s too early to assess whether Portugal will require further assistance before the deadline for returning to debt capital markets, the government probably will have an easier time negotiating a new rescue package than Greece because it’s making progress, Antonio Barroso, a London-based analyst at Eurasia Group, said in a Jan. 25 report.

Portugal has been selling treasury bills. The country auctioned 2.5 billion euros of three-, six- and 11-month bills on Jan. 18, the maximum set for the sale.

Borrowing Needs

The 11-month securities, the longest maturity auctioned by Portugal since it sought a rescue last April, were issued at 4.986 percent. That’s more than twice what neighboring Spain last paid for similar maturity debt. Portugal needs to borrow about 17.4 billion euros in 2012 and has no bond redemptions until June 2012, when 10 billion euros of debt matures.

The issue “isn’t short-term debt,” said Filipe Silva, who oversees 60 million euros of fixed-income holdings at Banco Carregosa SA in Oporto in northern Portugal. “It’s long-term debt and Portugal still doesn’t have conditions to return to the market.”

Portugal’s 10-year bond yield is the second highest in the euro zone after Greece and more than eight times the 1.84 percent rate of similar maturity German bunds, the region’s benchmark.

The cost of credit-default swaps insuring $10 million of Portuguese sovereign debt for five years rose to a record $4 million in advance and $100,000 annually today, CMA data show. That implies a 72 percent chance the government will default in that time.

Situation ‘Perilous’

The spread between Portugal and Germany shows the “Portugal situation is equally perilous” as Greece, said Peter Dixon, global equities analyst at Frankfurt-based Commerzbank AG, during an interview with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” program.

Unless Portuguese yields decline, it will become “more and more difficult” for the nation to raise money in the market, Gary Jenkins, the director of Swordfish Research in London, said in a Jan. 20 note to customers. “There remains the danger for bondholders that at some stage Portuguese politicians decide to follow the Greek example,” he said.

“Not only will a second aid package be required, but the recognition that a debt restructuring may be necessary is increasing,” Marc Chandler, chief currency strategist at Brown Brothers Harriman, wrote in a Jan. 24 report.

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