The good news is Greece won’t default on March 20, and 10-year borrowing costs for Spain andItaly have dropped below 5 percent. The bad news is similar- maturity Portuguese bonds still yield more than 13 percent.
Last week, Greece pushed through the biggest sovereign restructuring in history, with private holders forgiving more than 100 billion euros ($131 billion) of debt, a condition for the nation to win the bailout it needs to repay 14.5 billion euros of debt coming due next week.
Unlimited European Central Bank loans to banks have halted a bond-market rout that prompted investors to drive German yields to record lows and yield premiums on the securities of its regional peers to euro-era highs. The Italian 10-year yield has dropped more than 150 basis points and the rate on similar- maturity Spanish debt is about 80 basis points lower since the ECB announced Dec. 8 it would offer loans to financial institutions through two longer-term refinancing operations.
“The ECB liquidity is life support,” said Robin Marshall, director of fixed income in London at Smith & Williamson Investment Management, which oversees about $18 billion. “They’ve bought time but they must use the time to implement proper reform. It’s hard to see there not being more defaults, more private sector involvement. It makes it more likely we’re going to get another market rout later in the year.”
Portugal’s Borrowing Burden
Portuguese 10-year debt yields 13.71 percent, down from a euro-era record of 18.29 percent reached Jan. 31 though higher than its 2011 average of 10.17 percent. Two-year rates of 12.48 percent have doubled in the past year, though they are down from more than 21 percent at the end of January.
The ECB bought short-dated Portuguese securities on Feb. 29, according to two people with knowledge of the transactions who declined to be identified because trades with the central bank are private. That ended pause of at least two weeks in the central bank’s Securities Markets Program, through which it has bought almost 220 billion euros of euro-area government bonds.
Portugal, whose government debt is junk rated at Moody’s Investors Services, Standard & Poor’s and Fitch Ratings, risks becoming the next nation to need to restructure its debt, according to Matteo Regesta, a senior fixed-income strategist at BNP Paribas SA in London. Portugal’s deficit was 4 percent of gross domestic product in 2011.
“The market doesn’t believe that Greece is a unique case,” said Regesta. “Portugal is very similar. It would be easy to try to placate and distract the attention of the bond vigilantes, if only policy makers would immediately close the funding gap, pre-empting any further pressure on the periphery. I’m afraid I don’t think that’s going to happen.”
Portugal is raising taxes and cutting spending as it fights to meet the terms of its 78 billion-euro aid plan from the European Union and the International Monetary Fund after it followed Ireland and Greece in seeking a bailout in April.
Vitor Constancio, ECB vice president and former Bank of Portugal governor, said March 8 that Portuguese austerity measures were on track and Greece’s debt swap would not need to be repeated. The following day, German Finance Minister Wolfgang Schaeuble called Greece a “completely unique case.”
Investors have lost 11 percent on Greek bonds since Dec. 8, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese bonds have returned 1.9 percent, lagging behind gains of 15 percent on Italian securities, 8.4 percent on Spanish debt and 1.7 percent on German bunds, the indexes show.
‘Suspicion and Alarm’
While last week’s swap reduces Greece’s privately held debt by about half, the government’s decision to force holdouts to participate may backfire by deterring investors from keeping cash in European sovereign debt, said John Wraith, a fixed- income strategist at Bank of America Merrill Lynch in London.
“Recent spread narrowing has been driven by the LTROs and shorter term and speculative buying,” said Wraith. “None of this changes the fact that important, major overseas investors view recent developments with suspicion and alarm. With such a range of damaging precedents being set, they are highly unlikely to change that view and return as fundamental, long-term holders of these bonds for the foreseeable future.”
Italy’s 10-year yield was 4.86 percent at 9:47 a.m. London time, down from a euro-era record 7.48 percent on Nov. 9. Spain’s 10-year bonds yielded 5.02 percent, with the rate on German 10-year bunds, the euro region’s benchmark government securities, at 1.78 percent.
“I’m not forecasting a second default, but the markets certainly are,” said Bill Gross, co-chief investment officer at Pacific Investment Management Co., which manages the world’s biggest bond fund. “The rules have been changed here,” he said in a March 9 radio interview with Tom Keene and Ken Prewitt on “Bloomberg Surveillance.”