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25 January 2012

FT: Portuguese bonds hit as traders fear default

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Standard & Poor's became the last rating agency to downgrade Lisbon to junk, marking the moment for many investors when default looked inevitable for Portugal as well as Greece.

As the rating agency’s action prompted forced selling by funds not allowed to hold junk-grade bonds, other investors joined the exodus as views hardened that Portugal was heading towards a similar fate to Greece, which is expected to default imminently.

More critically, the fear is that should Portugal follow Greece, it could spark default contagion to the bigger, more strategically important economies of Italy and Spain, which in turn would reignite fears of a eurozone break-up that undermined the markets at the end of last year.

Certainly, the markets are pricing in a Portuguese default with 10-year bonds trading at about 50 per cent of par, a deeply distressed level in the eyes of many investors.

Portugal is also the only peripheral eurozone bond market that has failed to rally since the European Central Bank announced plans to offer three-year loans to the eurozone’s banks on December 8, a move that averted a credit crunch.

Full article (FT subscription required)

© Financial Times

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