With a higher debt burden and a slower 10-year growth rate than Greece, Western Europe’s poorest country is being punished by investors as the sovereign debt crisis spreads. The risk premium on Portuguese bonds rose to more than double the past year’s average this month. Portugal’s credit default swaps show investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala.
“We do not ignore that Greece’s particular situation has contagion risks, and we are feeling it,” Finance Minister Fernando Teixeira dos Santos told reporters in Lisbon on April 22. “The performance of spreads in the market reveals that contagion risk.”
Standard & Poor’s today cut its long-term local and foreign currency sovereign rating for Portugal to A- from A+ and said the outlook was “negative.” It also reduced Greece to below investment grade, to BB+ from BBB+ with a negative outlook.
The extra yield that investors demand to hold Portuguese debt rather than German equivalents rose to 260 basis points, the most since at least 1997. Greek spreads rose to 675 basis points, the most since at least 1998.
Portuguese Prime Minister Jose Socrates’ push to convince investors his country will avoid Greece’s fate is being hobbled by an economy that’s expanded less than an annual average of 1 per cent for a decade and is reliant on tourism and industries such as cork and pulp.
While Portugal’s public debt of 77 per cent of gross domestic product is on a par with that of France, the burden including corporate and household debt exceeds that of Greece and Italy, at 236 per cent of GDP. The savings rate is the fourth-lowest among 27 members of the Organization of Economic Cooperation and Development, according to the Paris-based group’s data.
“The reason we’re concerned about Portugal is not because its public sector debt ratios are excessively high, it’s more that the Portuguese economy doesn’t really grow,” said Kenneth Wattret, chief euro region economist at BNP Paribas SA in London.
EU policy makers’ difficulty in containing the Greek crisis is stoking the threat of contagion, just as the near-collapse of Bear Stearns Cos in 2008 undermined other US banks, exacerbating the credit crisis.
The risk for Portugal is that investors who are trying to protect their portfolios from a Greek-like rout will dump holdings of small euro countries, such as Portugal. Once that happens, surging bond yields could put Portugal in the same spiral that Greece is trying to escape.
Portugal is among countries that are “conspicuously vulnerable” and may need a bailout, said Kenneth Rogoff, a professor at Harvard University in Cambridge, Massachusetts, in a telephone interview.
Credit default swaps on Portuguese debt, which insure against default, rose 24 basis points to 335 today according to CMA DataVision, near a record. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. An increase in swaps signals deterioration in perceptions of credit quality.
The International Monetary Fund in Washington said last week that Greece’s fiscal crisis may spread to other European countries. Investors are trying to avoid being caught by the “next Greece,” said Olaf Penninga, who helps manage 140 billion euros ($187 billion) at Robeco Group, an 80-year-old Rotterdam-based asset manager.
Portugal plans to raise as much as 25 billion euros this year, equivalent to 15 percent of GDP. That compares with 21 billion euros last year, according to the national debt agency.
