A sharp fall in Portugal’s borrowing costs has taken them closer to those of exemplary Ireland than of struggling Greece, but bond prices show investors remain sceptical it will be able to avoid a second bailout.
Portuguese bond yields have fallen sharply from euro-era highs hit in January as fears it would follow Greece in restructuring its debt eased after the government introduced sweeping austerity measures.
Short-term yields are again lower than those for borrowing over longer periods, reversing an abnormal inversion of the yield curve that lasted from Mar 2011 until last month and reflected investor expectation of a near-term default.
But with 10-year yields still at 10%, a level deemed unsustainable over the long term, analysts say Portugal will struggle to return to the bond market next year as planned and is likely to need another bailout.
“The Portuguese yield curve is steepening artificially in a way, because it’s the prospect of central bank purchases that is driving that normalisation,” Grant Lewis, head of research at Daiwa Capital Markets Europe said.
“What longer-dated paper is being priced at, that’s a better measure of whether a country is going to return to capital markets or whether it’s going to need another programme. At the moment they suggest that it needs another programme.”
In June, Portugal passed the latest review under the terms of its €78bn bailout, agreed in May 2011, but the belt-tightening has contributed to its deepest recession since the 1970s.
Many analysts doubt Portugal will be able to meet this year’s fiscal targets as set out under the EU/IMF package, and will either have to renegotiate its targets or will need between €20bn and €30bn of extra aid.
These concerns have kept five and 10-year yields at unsustainable levels, analysts said.
While Portugal’s five-year borrowing cost stands at 8.6%, down from a euro-era high above 20% in January, it remains above Ireland’s 4.8%, Spain’s 5.7% and Italy’s 4.9%.
For Portugal to affordably issue bonds again, 10-year yields would have to head back towards 6%, said Padhraic Garvey, head of investment grade debt strategy at ING.
“Portugal has not gone down the Greek route and is closer to the Irish route than it is to the Greek route,” he said, but added it was two or three years away from returning to markets.
Portugal, Greece and Ireland all had to resort to bailouts as a result of the crisis, but while Greece was forced to restructure its debt in February, Ireland’s austerity drive has been hailed a success by financial markets.
Bond yields for most of the eurozone’s highly-indebted countries have tumbled since ECB chief Mario Draghi said last month that the bank would do whatever was needed to preserve the euro.