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31 January 2012

FT: Portuguese yields drop on ECB intervention

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The European Central Bank has intervened in the Portuguese bond markets, amid worries that the sharp lurch in the country's borrowing costs could lead to contagion in other markets.

The ECB has become increasingly concerned about soaring Portuguese bond yields, which it does not see as reflecting the country’s fundamentals. The central bank has justified its bond-buying programme – begun in May 2010 – on the grounds that it is restoring the correct “transmission” of its monetary policy decisions to the real economy. The ECB sees Portugal’s plight as linked to concern about the losses eurozone policymakers are seeking on Greek private sector bond holders, which would trigger a default by Athens.

Many investors say a Greek default would prompt Lisbon to follow suit. The ECB hopes that once Greece’s future funding is resolved, the financial markets might give Lisbon’s reform programme a fairer assessment, which would depress yields and in turn reduce the central bank’s need to intervene.

Elsewhere, optimism sparked by the ECB’s liquidity injection continues with Italian, Spanish and Irish bond markets rallying further on Tuesday. There are also signs the bank funding markets are at last re-opening.

Full article (FT subscription required)

© Financial Times

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