A Portuguese national flag flies above the parliament building in Lisbon, Portugal, on Wednesday, July 6, 2011. Portugal's downgrade to junk status and wrangling over the role of investors in a new Greek bailout package fueled concern about the solvency of the region's high-debt nations, sending their bonds tumbling. Photographer: Mario Proenca/Bloomberg
© Bloomberg

Portuguese debt came under further pressure on Wednesday, extending a testing week, after the rating agency that is key to the country’s eligibility for the European Central Bank’s bond-buying plan warned that pressures are mounting.

The benchmark 10-year yield jumped 11 basis points to 2.94 per cent, up from 2.68 per cent at the start of the week after DBRS, the rating agency, cast some doubt on how long Portugal will maintain its investment grade rating.

“Friday’s Q2 GDP release (which showed growth at just 0.2 per cent) raised our concerns about growth prospects, which appear to be slowing into the third quarter,” Fergus McCormick, the head of sovereign credit ratings at DBRS told Reuters. “Therefore, the outlook remains stable, but pressures appear to be mounting from these various fronts.”

DBRS is the only recognised institution to rate the former bailout country as investment grade — a status that allows it to qualify for the ECB’s mass bond-buying scheme and for Portuguese banks to access cheap loans from the central bank.

Portuguese banks currently borrow €24.8bn from the ECB, according to Rabobank, with sovereign bonds making up a large proportion of the collateral used. “This means that if PGBs were no longer eligible it would be a problem for Portuguese banks,” said Richard McGuire, a strategist at Rabo.

Portugal’s five-year bond yields are at their highest since late July.

DBRS is the only member of the four recognised credit agencies, including S&P, Moody’s and Fitch, whose rating allows the ECB to keep buying Portuguese debt under its stimulus measures.

Despite a difficult week, Portuguese bond yields are still well below the 4.4 per cent hit in February, when market tremors about the state of global growth saw peripheral eurozone debt subject to heavy selling pressure. Although they recovered from those levels as concern about a global recession receded, Portuguese yields most recently spiked in the wake of the Brexit vote in late June when they hit 3.6 per cent.

DBRS makes its next rating decision on October 21, a week after Lisbon is set to lay out its latest fiscal consolidation plans to the European Commission as it seeks to reduce its budget deficit to 2.5 per cent of GDP this year.

Brussels has avoided imposing its first fines for budgetary non-compliance but is still demanding the Socialist-led government carries out spending cuts and tax hikes worth 0.25 per cent of GDP in 2016.

DBRS currently has Portugal on its lowest investment grade rating of BBB (low) with a stable outlook. That suggests the agency will not junk the country in October but analysts point to persistently sluggish growth, looming austerity, and a still troubled banking sector as reasons for concern.

Portugal grew just 0.2 per cent in the second quarter, with GDP growth set to fall below 1 per cent this year, according estimates from Citi.

“A move for more austerity could well shake the fragile stability of the Socialist-led minority government,” said analysts at the US bank.

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