November 9, 2015
1:58 pm
Portugal
power struggle hits bond market
Joel Lewin in London
Portuguese bonds
were being sold heavily on Monday as an alliance of leftwing parties
prepared an effort to overthrow the centre-right government that has
been in power for just two weeks.
As prices fell,
Portugal’s 10-year bond yield jumped 0.21 percentage points to a
five-month high of 2.88 per cent.
Over the weekend the
opposition Socialist party (PS) sealed a pact with the radical Left
Bloc and the Communist party, all but guaranteeing the fall of Prime
Minister Pedro Passos Coelho’s party, which has enforced tough
fiscal discipline in line with EU demands.
“We suspect that
the higher fiscal deficit trajectory envisaged in the PS programme
would likely face significant opposition with Brussels, while likely
putting back on the table market concerns over Portugal’s fiscal
sustainability,” said strategists at Citi.
Portugal’s
government bonds have been under pressure since an inconclusive
election at the start of October left the country without a
government for a month.
The 10-year yield
has climbed 0.58 percentage points since the start of October amid
intense political uncertainty. In the same period, Italian 10-year
yields have risen just 0.09 percentage points.
“There are fears
it could end up in some wind-back back of austerity measures,” said
Matt Cairns, a strategist at Rabobank.
He added: “These
developments underline the fact that Portugal’s higher beta status,
and hence its being in pole position as a QE beneficiary, arguably
provides inadequate compensation for the elevated political risk
currently attendant to Portuguese government bonds.”
Portuguese stocks
have also been hit. The PSI 20 Index was down 2.4 per cent in midday
trade. In contrast, the FTSE Eurofirst 300 was down just 0.4 per
cent.
Meanwhile
Commerzbank warned that Portugal could potentially lose its only
investment grade rating when credit rating agency DBRS assesses it on
Friday. The rating is crucial, because at least an investment grade
rating is required for a country to be eligible for the ECB’s QE
programme.
“Amid mounting
political uncertainty, rating jitters are also on the rise for
Portugal,” said Rainer Guntermann at Commerzbank.
But Portugal is not
the only so called “peripheral country” whose bonds were getting
squeezed on Monday.
Spain’s 10-year
yield gained 0.08 percentage points to 1.98 per cent as Catalonian
MPs prepared to vote on a secession plan.
In addition,
analysts are warning that the success of far left parties in Portugal
could be heightening fears that leftwing populist parties could have
a similar impact in Spain, with general elections set to take place
in December.
“There’s some
sort of flow over effect,” said Mr Cairns. “It’s what it
represents in terms of the push from the people to grab control of
the purse strings. They want greater autonomy in terms of their
spending and where their taxes are spent.”
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