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Even the ECB's Cash Can't Stop Investors Worrying About Portugal

  • Socialist minority government is easing austerity measures
  • Yields climbed since election in contrast to Ireland, Spain

As bonds tumble across southern Europe, it’s beginning to look like the European Central Bank’s market stimulus never existed for Portugal.

The country’s bonds have slid since an inconclusive election on Oct. 4 led to weeks of political wrangling and a minority Socialist government promising to ease austerity. Yields on benchmark 10-year securities have climbed almost 80 basis points since then to 3.09 percent. They’re higher than when ECB President Mario Draghi unveiled his bond-buying program, or quantitative easing, last January.

While declines in higher-yielding government bonds in riskier parts of the euro region have shown this week the limits of the ECB’s impact, Portugal and Greece are the only countries in the 19-member currency bloc to have lost investors money over the past three months, returns compiled by Bloomberg show.

“For investors to keep Portuguese paper they need to see that the new government is following a path of fiscal responsibility,” said Ciaran O’Hagan, a strategist at Societe Generale SA. “The ECB’s QE is having an impact. It’s a tap that’s constantly flowing, but it can’t stop a tsunami.”

Austerity Brake

Central to the concern over Portugal is whether the government is shifting tack as it prepares to temper the austerity measures that won favor with investors, if not voters.

Prime Minister Antonio Costa’s government, sworn in at the end of November, is due to deliver a draft of its 2016 budget to European authorities this week. Plans include reversing state salary cuts and bolstering family incomes, policies he needs to ensure the support from the Communists and Left Bloc to have a majority in parliament.

The government already increased the minimum wage and plans to reinstate four holidays and reduce the working week for state workers to 35 hours, abandoning some measures introduced during Portugal’s three-year international bailout program that ended in 2014. It also plans to regain control of airline TAP SGPS SA.

Portugal still attracted foreign investors to a sale of 4 billion euros ($4.4 billion) of 10-year government bonds via banks last week. Finance Minister Mario Centeno said maintaining confidence in the country is crucial and it would be reflected in the budget. Bond yields peaked at 18 percent during the debt crisis.

Costa, 54, says he can still keep the budget deficit within the European Union limit of 3 percent of gross domestic product through 2019 as the country tries to deal with its 223 billion-euro debt pile.

Espirito Santo

Investors are taking more convincing after some bondholders in what remains of failed lender Banco Espirito Santo SA were forced to take losses. Costa has said he was concerned by the central bank’s treatment of those investors.

The extra yield on Portuguese 10-year bonds compared with German securities widened to the most since July on Monday. The spread has widened more quickly than Spain, which is going through its own post-election turmoil, and Ireland, where voters are expected to choose the next government as early as February.

“If we look at the reaction thus far year-to-date in the peripheral markets, the one market that stands out as under-performing is Portugal,” Scott Thiel, BlackRock Inc.’s deputy chief investment officer for fundamental fixed income, said in a Bloomberg Television interview on Jan. 18. “The political situation there, the market obviously has taken relatively negatively.”

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