Portugal resilient, not immune to risks
There is no question that Portugal is one of the success stories to come out of the eurozone sovereign debt crisis. Its 10 year yield, for instance, has recovered from above 16% at the peak of the crisis in 2012 to around 2% today. Amid the current pressures in the eurozone, precipitated by Italy's budget fiasco, Portugal has remained resilient. But rightly or wrongly, an escalation of matters there, or indeed elsewhere in the eurozone periphery, would bring extra pressure to bear.
By the end of this week, Portugal could return to investment grade status with all three of the big credit rating agencies. Moody’s is due to publish a review of its Ba1 rating on the sovereign on Friday. An upgrade would take it to investment grade territory and therefore also into key indices.
Over the last year, Portugal has propelled itself to investment grade status with Fitch and S&P. In its assessment, Fitch attributed its upgrade on December 2017 to a fall in Portugal’s gross general government debt, the first such decline by the sovereign since the eurozone crisis.
Following those two upgrades, Portugal was able to price a 10 year at the beginning of 2018 with a coupon of 2.125%, a far cry from the coupon of 4.125% of its 10 year just the year before.
However, Portugal’s success in the bond market is not a foregone conclusion, through no fault of its own
The concerns around Italy’s budget deficit have spilled over into other govvie markets in the eurozone periphery. A fresh sell-off happened this week following a letter by European commissioners to Italy's economy minister Giovanni Tria on Friday that said Italy's budgetary targets "point to a significant deviation from the fiscal path".
Italian BTP yields have been rising since before the new populist government took office. When talks over the formation of the new government collapsed at the end of May, yields soared on Italian bonds. The yield on the 10 year BTP reached 3.178% on May 29, having begun the month at 1.78%. Portuguese OTs took a beating in solidarity as its 10 year rose to 2.3% on the same day having started May at 1.6%.
While Portugal’s bonds have largely recovered since, trading at below 2%, the headlines from Italy have moved Portugal’s bonds cheaper and will continue to until Italy’s 2019 budget saga comes to an end — assuming there will be a positive outcome at the end of all of this.
And then there is good old Greece.
DBRS published its assessment of the risk of countries leaving the euro in the context of a sovereign financial crisis on Monday. Greece was the only sovereign it placed outside of the low risk category.
The rating agency said it “remains concerned that Greece’s official debt burden could again become a source of tension between Greece and its main creditors”.
It added: “If Greece is unable to sustain its primary surplus commitments, its creditors may be less willing to contemplate additional debt relief. If simultaneously faced with persistently weak growth, a future government could conclude that Greece has exhausted other options and the cost of remaining inside the currency area is too high.”
Portugal should be applauded for its recovery, but the sovereign debt crisis of 2012 showed that investors take no prisoners. The bond market fates of the countries in the eurozone periphery are still, rightly or wrongly, entwined. Contagion is always a possibility.