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Article / 31 August 2016 at 10:00 GMT

Weekly Bond Update: Portugal grasping at straws

Fixed Income trader / Saxo Bank
  • Portugal crisis looming as DBRS credit rating agency ponders a downgrade
  • European Central Bank would take dim view of loss of investment grade
  • Portugal can ill-afford to lose its biggest debt buyer
  • Relatively unknown DBRS may simply be enjoying its moment 'in the sun'

Beautiful Lisbon draws the crowds but the vultures are gathering as only the
DBRS credit rating agency is holding up Portugal's investment grade. Photo: iStock

By Michael Boye

Greece has long been publicly labeled as the weakest link in the Eurozone, but with its problems now in rear view mirror — at least as far as the market is concerned — fresh concerns are now surfacing over another periphery economy, namely Portugal.

The most recent winners of Euro 2016 this summer might be champions of Europe in terms of football, but in the eyes of the bond market and credit rating agencies, its fame has been withering for some time.

In fact, while all the major agencies now hold sub-investment grade ratings of the sovereign, the less familiar and much smaller DBRS agency is now the only one attaching an Investment Grade to its bonds. While investors rarely notice the opinion of this particular agency, it is vital for Portugal, as this rating is the only thing keeping it in the good graces of the European Central Bank. Lose this rating, lose your biggest debt buyer.

This could soon be a very real problem, as lately DBRS has been very outspoken in its critique of the state of the nation's finances. The issue is rather bizarre though, and you have to wonder whether this otherwise nameless rating agency is simply enjoying its time in the sun, taking advantage of this unique set of circumstances. 

Apart from the DBRS downgrade issue, the most recent worry is that the bailout of Caixa Geral which will necessitate an “amended budget” and thus potentially lead the way to another budget battle with Bruxelles.

In absolute terms, the yield levels are not alarming yet, so there is also the chance that the market might be too complacent about this. In a continuation of the too-big-to-fail paradigm, the market could be reasoning (with good reason we might add) that even if they lose this Investment Grade status, the ECB will find another excuse to keep buying Portugal bonds or ultimately bail them out.

Portugal 10 year spread is more than 100 bps wider this year..

Source: Bloomberg

But in historical context the yield is still far from the worst crisis levels…
10 year

Source: Bloomberg

In comparison though, early 2015 Portugal 10 year spread was level with Spain, but has expanded 200 bps since…
PT and SP


Source: Bloomberg

— Edited by Martin O'Rourke

Michael Boye is on the Saxo Bank fixed income desk


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