By: Dr. Mike Campbell
A fresh wave of concern over Portugal’s ability to meet its debt obligations has pushed bond yields higher and the Euro lower. The Portuguese authorities have been quick to offer reassurances that they do not need any bailout and they are able to go to the market to meet their financial obligations. Indeed, at last month’s bond auction, Portugal raised €1.25 billion from the sale of four and ten year government bonds at an average yield of 6.7%.
The yield on Portuguese bonds hit 7.6%, its highest level since the introduction of the Euro, before the ECB stepped in and bought the bonds, reducing the yield down to 7.2%. Obviously, if the yield on Portuguese bonds rises, it makes it more expensive to service the nation’s debts and increases the risk of a default. The chance of Portugal defaulting on its debts is very small indeed, but the perception of higher risk pushes bond yields up.
Portugal in Denial?
According to a Portuguese cabinet minister, Mr Pereira the renewed sovereign debt concerns are not centred on Portugal, but reflect general concerns about the extent of European sovereign debt. "This has to do with sovereign debt markets, and not only in relation to Portugal, but rates at the European level - all subject to speculative moves attacking the Euro."
The Portuguese insist that they are not in the same situation as Greece or Ireland since they are in a healthier position with respect both to national debt and deficit levels and Portugal has not seen a property bubble – the situation which precipitated the Irish problems.