Portugal Bears Brunt of Bond Selloff With Yield at 2014 High

  • Euro-area finance ministers to review nation's budget Thursday
  • Minority Socialist government to reverse state salary cuts

Portugal’s 10-year bonds plunged, pushing the yield to the highest level since the country exited its bailout program in May 2014 and adding pressure on Prime Minister Antonio Costa less than three months after his minority Socialist government took office.

The security fell for a sixth day Thursday, pushing the yield up to 4.53 percent, the highest since March 2014. It was at 2.30 percent just before an inconclusive Oct. 4 general election and peaked at 18 percent in 2012 at the height of the euro region’s debt crisis.

Costa was sworn in at the end of November and plans to reverse state salary cuts faster than the previous administration proposed, while increasing indirect taxes. Costa says he can do that and keep the budget deficit within the European Union limit of 3 percent of gross domestic product through 2019.

The European Commission last week told Portugal to adopt measures to ensure its 2016 budget complies with the provisions of the EU’s stability and growth pact, while stopping short of rejecting the plan. The government already had to provide additional measures worth as much as 845 million euros ($957 million) to the Commission after submitting the initial draft of the budget on Jan. 22.

The rise in yields isn’t linked to the discussion on the budget, Minister of the Presidency Maria Marques told reporters in Lisbon on Thursday. “This instability isn’t related to particular circumstances as the budget was approved by the European Commission and this is just a coincidence in terms of timing,’’ Marques said.

Portuguese debt led Thursday’s selloff among peripheral nations in the euro area, with Italian, Spanish and Greek bonds also dropping.

Finance Ministers

Euro-area finance ministers will review Portugal’s draft budget and the commission’s opinion at a meeting in Brussels on Thursday. Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of his euro-area colleagues, said that Portugal needs to “stand ready” if needed to do more to comply with the stability and growth pact.

Costa says his minority government will be propped up in parliament by the Left Bloc, Communists and Greens, which haven’t followed the Socialists in backing EU budget rules in the past. The government is also raising the minimum wage and reducing the working week for state workers in an attempt to remove some measures introduced during the bailout program. On Feb. 5, Portugal cut the 2016 growth forecast it presented two weeks earlier to 1.8 percent and said debt will decline to 127.7 percent of GDP in 2016.

“Financial markets have become more volatile, making financing the high levels of sovereign debt more of a challenge for the government,” the European Commission and the European Central Bank said in a joint statement about Portugal on Feb. 4.

Portugal last year took advantage of low borrowing costs to sell longer-maturity bonds and make early repayments on part of its International Monetary Fund aid loan. The 10-year yield fell to as low as 1.5 percent in March 2015 following the ECB’s announcement of its bond-buying program.

The yield on Portugal’s 10-year bond rose 38 basis points, or 0.38 percentage point, to 4.09 percent at 3 p.m. London time, after climbing 78 basis points in the previous five days. The 2.875 percent security due in July 2026 fell 3.09, or 30.90 euros per 1,000-euro face amount, to 89.80.

The yield premium investors demand for holding the debt instead of benchmark German bunds rose to 3.90 percentage points after reaching 4.40, the most since November 2013.

Bond Redemptions

The cost of the Portuguese state’s debt outstanding is 3.5 percent, according to debt agency IGCP. Portugal’s EU and IMF aid loans have an average cost of 3 percent and an average maturity of 15.6 years. Portugal faces bond redemptions of 6.6 billion euros this year and in January carried out a sale via banks of 4 billion euros of 10-year bonds with a yield of 2.973 percent.

The previous government built up a cash buffer before the aid program ended in 2014 and the debt agency forecasts the treasury cash position will be 9.5 billion euros at the end of 2016, compared with 6.6 billion euros at the end of 2015.

Portugal’s debt is rated below investment grade by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s. The credit rating was retained at investment grade by DBRS Ltd. on Nov. 13, securing its eligibility for inclusion in the ECB’s bond-buying plan. DBRS is scheduled to report on Portugal’s rating on April 29.

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