World Economy

Portugal Qualifies for ECB Bond Purchase Plan

Portugal Qualifies for ECB Bond Purchase PlanPortugal Qualifies for ECB Bond Purchase Plan

Just when Portugal thought things couldn’t look any worse for its bond market, they did.

After a rally in Greek debt in recent weeks, the country is the only part of the eurozone to lose money for investors this year. Now the difference between their 10-year borrowing costs has narrowed to the least since the European Central Bank unveiled its bond-purchase plan in January 2015. What makes it more notable is that Greece doesn’t qualify for the quantitative easing program, which has propped up markets. Portugal does, Bloomberg reported.

While Greece won a new chunk of aid last month and a promise to look again at potential debt relief in the future, Portugal is going backward, at least in the eyes of some investors. Prime Minister Antonio Costa increased public sector wages and is reducing the working week as he reverses some measures introduced during the bailout program Portugal exited in 2014. Like Greece, Portugal still has bad loans at its banks to address.

“Changes to the reforms done by the previous government has led investors to have a perception of increased risk,” said Diogo Teixeira, chief executive officer of Optimize Investment Partners, a Lisbon-based firm that manages about €120 million ($134 million). “An improvement isn’t foreseen in the short term. If more risk factors appear, it’s not the ECB’s quantitative easing that will stop an increase in Portugal’s yields.”

The Greek 10-year bond yield dropped below 7% for the first time in six months on May 25 after the deal with creditors.

 It now yields 7.3%, about four percentage points more than bonds issued by Portugal, whose 10-year yield is at 3.2%, up from 2.4% at the start of January 2015.

The difference, or spread, between Portugal and Germany has widened about 90 basis points since the start of 2015 to three percentage points, albeit still a fraction of the record 16 points at the height of the region’s debt crisis in 2012.

Portuguese debt is rated junk by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s. The government forecasts debt will decline for a second year to 124.8% of gross domestic product in 2016. The European Commission forecasts economic growth of 1.5% for Portugal this year, compared with 2.6% for Spain or 4.9% for Ireland, which also went through an international rescue package.

“Portugal’s economy continues to grow much more moderately than other eurozone periphery countries,” Kathrin Muehlbronner, a senior vice president at Moody’s, said in a statement on May 24. “Hence, growth will not provide much support for the planned fiscal consolidation and reduction of the very high public debt ratio.”