Can Portugal Escape a Bailout?
CNBC EMEA Head of News
Following in the footsteps of Greece and Ireland, the Portuguese market looks set for a speculative attack, Silvio Peruzzo, European economist at RBS in London, told CNBC.
Portuguese bonds are trading at euro-era highs, raising fears that Lisbon could be forced to take a bailout from the EU and IMF before a crucial meeting of heads of state meeting in late March.
“As seen in the case of Greece and Ireland, this momentum is hard to fight, with speculative attacks continuing until we see a circuit breaker in the form of a bailout,” he said.
“The Portuguese curve is in the process of transforming itself into a credit curve – i.e. increasingly reflecting investor demand for protection against default,” Peruzzo said .
The yield on Portuguese 10-year bonds was trading at 7 percent a few months ago - a level regarded as unsustainable for Portugul to continue to cover its funding needs. The yield is now well above 7 percent.
“European debt looks set for a volatile week with the periphery remaining under pressure and the ECB being forced back into the market. Crucially, with 10-year Bunds at 3.20 percent, 7.70 percent or so on Portuguese 10-year bonds may well represent the ECB’s own line in the sand,” said Peruzzo .
Lessons from Ireland
In the case of Ireland, Prime Minister Brian Cowen’s government continuously said the country did not need a bailout - until it did.
Portuguese yields would dictate the country's future more than government rhetoric, according to Peruzzo.
“LCH Clearnet imposed an additional 15 percent margin requirement for Irish debt once Irish 10s (10-year bonds) breached 450 basis points over euro area AAA benchmarks,” Peruzzo said.
“In significantly eroding returns at even these elevated yield levels, this move acted as a catalyst for yet further pressure on Irish debt with the clearing house doubling its added margin requirement to 30 percent a week later and helping to expedite the Irish bailout that came days thereafter,” he added.
In the short term the Portuguese have a few avenues for avoiding a bailout, Peruzzo said.
"This will help them get better terms, but over the medium term it will be very difficult for Portugal to avoid a bailout” Peruzzo said. “Any deal on the European Financial Stability Fund needs to include a solution for Portugal.”