Portugal Bonds Hurt by Politics May Face QE Eligibility Headwindby
Nation may lose crucial investment-grade rating on DBRS review
ECB could still get waiver to keep buying, Commerzbank says
Portugal’s government bonds, the worst performers in the euro zone over the past month, face another hurdle with a potential credit-rating downgrade that may see them excluded from the European Central Bank’s asset-buying program.
For Portugal’s bonds to be eligible for purchase, the nation must be rated investment grade by at least one major ratings company. It has already been junked by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.
But the country still holds that crucial investment-grade status by DBRS Ltd. The Toronto-based company is scheduled to review its position on Friday, raising the possibility Portugal could lose a crucial source of support.
“The fear is that if DBRS downgraded them, it would trigger Portugal falling out of the eligibility,” said David Schnautz, a London-based interest-rates strategist at Commerzbank AG. “It’s obviously something that investors have to brace for. It’s a low-probability but high-impact event.”
If Portugal is downgraded, a waiver allowing the ECB to keep buying their bonds may be possible, Commerzbank analysts wrote in a research note.
An ECB spokesman declined to comment.
Portuguese bonds erased an earlier decline Wednesday after a loose alliance of left-wing parties ousted Prime Minister Pedro Passos Coelho less than six weeks after the country’s inconclusive election. That brought the possibility of a sustained political stalemate and the rolling back of economic reforms agreed to as part of its 2011 rescue.
The 10-year bond yield fell one basis point, or 0.01 percentage point, to 2.76 percent as of 10:30 a.m. London time, having reached 2.91 percent on Nov. 9, the highest since July. The price of the 2.875 percent security due in October 2025 rose 0.10, or 1 euro per 1,000-euro ($1,074) face amount, to 100.96.
DBRS rates Portugal at BBBL, its lowest investment grade, with a stable outlook.