tagged: bankrupcty, debt restructuring, EU, euro zone, Greece, IMF, investors, Ireland, policies, portugal, second bailout

Is Portugal the Next Greece? And How About Ireland?

Posted by keeptalkinggreece in Economy

While Greece struggles in Brussels to convince its European partners of its good intentions, Portugal seems to follow the path of Greece. The IMF prescription programme didn’t help the Portuguese economy either. On Monday borrowing costs for Portugal rose to euro-era highs. The same happened with CDS that hit a record of 1,461 basis points. This reminding us the Greek situation when spreads and CDS were skyrocketing. Analysts blame the delays on the Greek second bailout for the Portuguese disaster and investors forecast that Portugal might seek a second bailout before the end of the year. “Nice” perspective for the euro zone, for the IMF and Merkel’s policies and a slap in the face of all those claiming that Greece is a unique problem.

“Portugal remains the target of speculation that it’s next in line for a bailout,” said TD Securities rates analysts in a note.

Currently Portugal has no need to tap capital markets, having secured an international rescue in 2011. But the country might need another bailout package next year if it can’t regain enough market access to repay EUR9 billion in debt falling due in September 2013.

The five-year Portuguese government bond yield was at a euro-era record of 21.8%, while the yield on the 10-year bond at around 16.1%, more than a full percentage point higher from the close Friday, according to data from Tradeweb.

The climb started mid-month after a Standard and Poor’s Corp. downgrade left the country’s debt rated “junk” by all three major credit rating companies, forcing some investors to sell their bond holdings.

Yields have continued to rise amid the ongoing Greek negotiations, with investors worried they might set a precedent.

Financial derivatives used by some to hedge their exposure to Portugal were also near records. (NASDAQ )

Portugal is now the second most-expensive sovereign borrower in the world to insure against default after Greece. Numbers three and four are Venezuela and Ukraine.

 A couple of days ago, REUTERS reported that ”investors are betting that after cap-in-hand Greece comes Portugal, selling off its stocks and bonds in the belief that the euro zone laggard cannot avoid a default without a second bailout”. A a possible debt restructuring.

While borrowing costs have fallen for debt-ridden Spain and Italy as well as bailed-out Ireland on the back of a huge infusion of low-cost loans from the European Central Bank, Portugal’s have shot up, setting it on a path towards bankruptcy.

The rot really set in two weeks ago after Standard & Poor’s downgraded 15 euro zone countries, putting Portugal in the “junk” category, along with Greece. That shuts it out from tapping capital markets in the foreseeable future and makes its task of meeting future debt repayments even tougher.

Since then, the rise in both government bond yields and the cost of insuring debt against default has been relentless.

This is the opposite of what has happened in Ireland, which was bailed out in November 2010 just six months before Portugal received a 78 billion euro bailout from international lenders.

“If we look at where bond yields are for Portugal it makes it impossible for Portugal to access debt markets in 2013,” said Nikolaos Panigirtzoglou, a rate strategist at JPMorgan.

“It’s a country that still relies on the official sector in terms of financing its current account deficit and repayments and this makes it certain that we’re going to get a second bailout for Portugal later this year.”

Portuguese debt and stocks have fared far worse than other highly-indebted euro zone given worries it could follow Greece and need to restructure its debt. (Further reading Here)

However also Ireland, the third euro zone country that sought the aid of IMF, struggles to avoid a second bailout. “Ireland’s chances of avoiding a second bailout after 2013 will critically depend on a solution to the eurozone debt and banking crisis” wrote the Ireland-based Independent. Read the whole article here.