Some Thoughts On Portugal

By Win Thin

Portugal remains in the market spotlight as its 10-year yield remains above 7% for the 10th straight day. Furthermore, today Portugal’s 5-year yield broke above 7% for the first time and continues the pattern that we saw with Greece and Ireland. In both those cases, the 10-year yield was the first to break above 7%, with the 5-year and then the 2-year yields breaking above that level in the ensuing days. It is noteworthy is that the rescue packages for those countries have done nothing to substantially lower their borrowing costs, with 10-year yields still substantially above 7% for both. With contagion showing no signs of abating, we think Portugal is doomed to the same fate.

What about the next likely victim? Spain 10-year yields are the next highest in the periphery and now around 5.39%. But note that Ireland 10-year yields were around 4.6% right after the Greece rescue package was announced, and that Portugal 10-year yields were just above 5.9% right after the Ireland rescue package was announced. The timeline between rescues appears to have shortened, with close to 7 months between Greece and Ireland but likely down to 3-4 months between Ireland and Portugal if current trends continue.

Portuguese press reported today that Germany is pushing the country to take a rescue package as soon as possible, and before European leaders unveil long-awaited changes to its rescue fund in March. We had thought that Portugal might wait to tap the rescue fund at the same time that the changes are announced next month, but the timing is not that crucial. Rather, bond markets are signaling that a rescue for Portugal is seen as pretty much inevitable. Note that Portugal central bank Governor Costa yesterday admitted that the economy is already in recession and will remain so in 2011. Portugal contracted q/q in Q4, so it appears that Costa is looking for continued contraction in Q1 and beyond. High borrowing costs plus economic contraction means that the debt dynamics will continue to unravel. Indeed, that is why Greece and Ireland debt ratios are going to get worse for several years still.

Portugal Yields

5-Year CDS Periphery

10-Year Spread to Bunds Periphery

10-Year Yield Periphery

4 Comments
  1. Mike says

    Let me give you some data about Portuguese economy :

    – Portugal do not have neither had a real estate bubble.

    – Portuguese banks are financially strong and for example in better shape that in Spain

    – The trend for Portuguese exports are very strong, right now. recently we had in Portugal the biggest export congress where we could see the mentality and capacity emerging from Portuguese companies : In Portuguese see all info here – http://www.portugalglobal.pt/PT/geral/Paginas/PROGRAMADOCONGRESSODASEXPO… you will have access to PDF files from some companies with presentations and numbers.

    – Look out for some clusters in very near future in Portugal, like Renewable Energy and all related to that like EV and mobility grids.

    – Watch out Portugal Fresh and agriculture branding, Tourism in Douro Valley, start-ups from Portugal see more info here : http://lusitanaehabilitas.blogspot.com/

    and much more….

    Are markets reflecting all data from Portuguese economy? NO
    2010 GDP for Greece -6%
    2010 GDP from Portugal 1.4%
    See Public Debt from Belgium and Italy and compare with Portugal
    See Export dynamic From Portugal and from Spain

    So why this yield for Portugal’s bonds? zzzzzz

    I like to say : It’s free to acquire knowledge freely

  2. Mike says

    Let me give you some data about Portuguese economy :

    – Portugal do not have neither had a real estate bubble.

    – Portuguese banks are financially strong and for example in better shape that in Spain

    – The trend for Portuguese exports are very strong, right now. recently we had in Portugal the biggest export congress where we could see the mentality and capacity emerging from Portuguese companies : In Portuguese see all info here – http://www.portugalglobal.pt/PT/geral/Paginas/PROGRAMADOCONGRESSODASEXPO… you will have access to PDF files from some companies with presentations and numbers.

    – Look out for some clusters in very near future in Portugal, like Renewable Energy and all related to that like EV and mobility grids.

    – Watch out Portugal Fresh and agriculture branding, Tourism in Douro Valley, start-ups from Portugal see more info here : http://lusitanaehabilitas.blogspot.com/

    and much more….

    Are markets reflecting all data from Portuguese economy? NO
    2010 GDP for Greece -6%
    2010 GDP from Portugal 1.4%
    See Public Debt from Belgium and Italy and compare with Portugal
    See Export dynamic From Portugal and from Spain

    So why this yield for Portugal’s bonds? zzzzzz

    I like to say : It’s free to acquire knowledge freely

  3. Laturb says

    Who takes haircuts if Portugal decide not to seek ECB help?

  4. Laturb says

    Who takes haircuts if Portugal decide not to seek ECB help?

  5. Daniel says

    interesting chart (and comment)

    Thomas Fricke – An deutschem Blödsinn genesen

    http://www.ftd.de/politik/deutschland/:kolumne-thomas-fricke-an-deutschem-bloedsinn-genesen/60013832.html

    1. Edward Harrison says

      Daniel, as always, thanks for the link. Cheers.

  6. Daniel says

    interesting chart (and comment)

    Thomas Fricke – An deutschem Blödsinn genesen

    http://www.ftd.de/politik/deutschland/:kolumne-thomas-fricke-an-deutschem-bloedsinn-genesen/60013832.html

    1. Edward Harrison says

      Daniel, as always, thanks for the link. Cheers.

Comments are closed.

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