Will Portugal repeat Greek tragedy?

08:47, April 28, 2010      

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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. Portugal's credit default swaps show investors rank its debt as the world's eighth-riskiest, worse than for Lebanon and Guatemala.

"We do not ignore that Greece's particular situation has contagion risks, and we are feeling it," Finance Minister Fernando Teixeira dos Santos told reporters in Lisbon. "The performance of spreads in the market reveals that contagion risk."

Greek bonds tumbled on Monday, pushing yields to the highest since at least 1998, on speculation over the timing of the European Union bailout package for Greece. Portuguese spreads, the extra yield that investors demand to hold its debt rather than German equivalents, jumped to 218 basis points, the most since at least 1997.

Portuguese Prime Minister Jose Socrates' push to convince investors his country will avoid Greece's fate is being hobbled by an economy that's expanded less than an annual average of 1 percent for a decade and is reliant on tourism and industries such as cork and pulp.

While Portugal's public debt of 77 percent 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 percent of GDP. 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 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," said Kenneth Wattret, chief euro region economist at BNP Paribas SA in London.

Threat of contagion

EU policymakers' difficulty in containing the Greek crisis is stoking the threat of contagion, just as the near-collapse of Bear Stearns Cos in 2008 undermined other US banks, exacerbating the credit crisis.

The risk for Portugal is that investors who are trying to protect their portfolios from a Greek-like rout will dump holdings of small euro countries, such as Portugal. Once that happens, surging bond yields could put Portugal in the same spiral that Greece is trying to escape.

Portugal is among countries that are "conspicuously vulnerable" and may need a bailout, said Kenneth Rogoff, a professor at Harvard University in Cambridge, Massachusetts.

Credit default swaps on Portuguese debt, which insure against default, reached 308 basis points on Monday. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. An increase in swaps signals deterioration in perceptions of credit quality.

The International Monetary Fund in Washington said last week that Greece's fiscal crisis may spread to other European countries.

Investors are trying to avoid being caught by the "next Greece", said Olaf Penninga, who helps manage 140 billion euros ($187 billion) at Robeco Group, an 80-year-old Rotterdam-based asset manager.

Portugal plans to raise as much as 25 billion euros this year, equivalent to 15 percent of GDP. That compares with 21 billion euros last year, according to the national debt agency.

"As spreads get higher the problems are getting bigger: it's a self-fulfilling prophecy," Penninga said. "It will get more difficult now for Portugal to tap markets." Robeco reduced exposure to Portuguese bonds last year and sold the last ones in March.

Portuguese companies have responded to slow growth at home by expanding outside their borders. Lisbon-based Cimpor-Cimentos de Portugal SGPS SA, one of the world's 10 biggest cement companies by market value, gets more than three-quarters of its revenue from outside Portugal, and Lisbon-based Jeronimo Martins SGPS SA, the biggest Portuguese retailer, gets most of its sales from Poland.

Portugal's PSI20 stock index climbed 14 percent in the past year, less than half as much as Germany's DAX and the Stoxx Europe 600 Index.

Source: China Daily


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