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Is Portugal fated to follow Greece in its tragic footsteps?

Out with the old, and in with the new?

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 alone. With Portugal’s credit default swaps showing investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala, one has to wonder is Portugal about to perform its own version of a Greek tragedy? Is Portugal at risk of becoming the “New” Greece?

Yesterday the Euro slipped against all its major currency counterparts, in the forex market, as uncertainty intensified over how and when Greece would get the financial aid sought last week to avert a potential sovereign debt default. The spread between Greek and German 10-year government bond yields hit a new 12-year high of 679 basis points on Monday, indicating market concern over the implementation of the aid package and the conditions attached to it. Portuguese spreads, the extra yield that investors demand to hold its debt rather than German equivalents, followed in Greece’s footsteps jumping to 218 basis points, the most since at least 1997.

While Portuguese Prime Minister Jose Socrates tried to convince investors that his country will avoid Greece’s tragic fate, his attempts were thwarted by an economy that’s expanded less than an annual average of 1% for a decade and its economy is completely dependent on tourism and industries such as cork and pulp.

According to Kenneth Wattret, chief euro region economist at BNP Paribas SA in London, “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.” Moreover, the EU’s difficulty in containing the Greek crisis is strengthening the threat of “contagion”, just as the near-collapse of Bear Stearns Cos. in 2008 undermined other U.S. banks, exacerbating the credit crisis.

Despite the fact that Portugal’s public debt of 77% 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% of GDP. Moreover, 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 real risk for Portugal is that investors who are trying to protect their portfolios from a Greek-like rout will immediately begin dumping holdings of small euro countries, such as Portugal. Once that happens, surging bond yields could drag Portugal into the same downwards spiral that the Greece is so desperately trying to escape.

Tags: currency trading, Euro, euro zone, Forex market, Greece and the euro, greek debt crisis, Portugal

FX Today: Euro Drops as Investors have Crisis of Confidence

Today Greek bonds tumbled, pushing yields above the record highs seen last week as speculation grows that Germany may refuse to guarantee an early release of rescue funds. The 10-year Greek bond yield rose by 91 basis points to 9.71%. The two-year yield climbed 262 basis points to 13.6%.

The interest rate is 6.14 percentage points higher than Germany’s rate – Germany is seen as the safest investment in Europe. It is the largest spread in bond yields for 12 years. The increase indicates that investors are still nervous over plans to rescue the Greek economy in spite of progress on bailout talks over the weekend.

After Friday’s rally on the forex market the euro has fallen during todays trading. Against the US dollar the currency has dropped 0.21% on the day’s opening to EUR 1.33243 and it has fallen 0.76% against sterling to 0.86189 pence to the euro.

Greece’s debt, which totals 115% of GDP as well as a budget deficit of almost 14%, has forced the country to request 40 billion euro’s of aid from the European Union and the International Monetary Fund. Yesterday Greek Finance Minister George Papaconstantinou said talks with the IMF over the weekend went well and the IMF head, Dominique Strauss-Kahn, said a deal would be agreed “in time to meet Greece’s needs”.

Greece has 8.5 billion euro’s worth of bonds maturing on the 19th of May that it must repay. The EU is expected to provide 30 billion euro’s worth of aid this year with a further 10 billion euro’s to come from the IMF. However the scale of the assistance that Greece will require after this year remains unclear.

The backing of Germany, Europe’s biggest economy, is vital for any aid but Berlin faces public opposition to a financial rescue and is taking a tough line over the terms. “The government has not taken a decision (on aid),” German Foreign Minister Guido Westerwelle told reporters at a meeting of EU ministers in Luxembourg. “That means that the decision can fall in either direction. Offering money too soon would get in the way of Greece doing its homework with the requisite diligence and discipline.”

Despite German pressure on Athens, markets have kept pressure on Berlin by pushing up the cost of insuring Portuguese government debt to a record high amid fears that Portugal could be the next EU member state to face a debt crisis.

“The Greek crisis has started to spread to the rest of the periphery and Portugal seems to be next in line. The situation there is less urgent than in Greece, but the medium-term outlook is challenging,” one senior economist said. “Unless Europe’s leaders can draw a line under the situation, Portugal could face an uncomfortable period.”

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FX Guide-Dollar Drops for First Time in Four Days

Friday saw the US dollar drop against the euro for the first time in four days after Greece made a formal request to tap the 45 billion euro rescue package offered by the European Union and the International Monetary Fund a short time ago. It had hoped that just the promise of EU support, agreed last month, would have been enough to reassure markets and help its recovery.

But Greece’s problems have continued to hit investor confidence in the euro and other European economies.

On Thursday Eurostat released figures which revised the Greek budget deficit up from 12.7% of GDP to 13.6% of GDP. The agency also said doubts over the figures meant they could be revised again. At the same time Greece’s benchmark 10-year bond yield soared to a record high of almost 9%.

On Friday morning Greece called for activation of the financial lifeline. The appeal for help from the EU and IMF came after the surge in borrowing costs to what Greek Prime Minister George Papandreou called “unsustainable levels”. Following Prime Minister Papandreou’s request for assistance the interest rate fell to 7.99% before creeping back up to 8.66%.

The fall is a sign of a slight increase in confidence in Greece’s ability to pay back its loans. But analysts said there was still significant uncertainty ahead. “The market’s relatively modest reaction to the news that Greece was formally requesting aid from the EU and IMF was a clear sign that the market still believes that Greece will be forced to restructure its debt even with a bail-out,” one analyst said.

The euro rallied in late in Friday’s forex trading, ending in New York 0.87% higher against the US dollar at $1.33837.

Meanwhile, politicians from Greece’s fellow euro zone members, France and Germany, have warned Greece it must be far more prudent in future. The French economy minister, Christine Lagarde said that the EU would come down hard on Greece if it failed to act responsibly: “In the case of default on repayment, we will immediately put the foot on the brake.”

Germany’s finance minister, Wolfgang Schaeuble, also said aid should not be taken for granted, but was conditional on prudent behavior. He said any loan depended “entirely on whether Greece continues in the coming years with the strict savings course it has launched”.

But Mr. Schaeuble also stressed the importance of currency union to his country. He said: “We are defending the stability of the euro, because Germany benefits (from the currency) at least as much as all the others. Help for Greece is therefore not a waste of taxpayer money, but a move based on fundamental German interests.”

The Greek government has already taken austerity measures, including cutting government workers’ pay, freezing pensions and raising taxes. The cuts have proved unpopular, prompting strikes and demonstrations such as a march through Athens on Friday in which several thousand protesters took to the streets.

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