As Ireland is on brink of bailout the market vultures expected to turn on Portugal

News - Banking

Written by Ray Clancy

Friday, 19 November 2010 10:16

Market vultures and vigilantes could switch their sights to Portugal and her debt problems as Ireland moves to accept a bailout from the European Union and the International Monetary Fund.

As officials spend this weekend locked in talks to finalise a financial deal for Ireland it has become obvious that the so called vulture elements of the financial markets are active and there is still a severe risk of instability in the eurozone.

A resolution of the Irish debt crisis may simply shift the burden of speculation to Portugal, according to analysts. European Central Bank vice president Vitor Constancio believes that a bailout of Ireland will reduce financial pressures in the euro zone but he seems to be talking with a lone voice.

Analysts from Citigroup and Nomura International say any relief will be short lived as investors turn their focus to the next weakest peripheral nation. The markets indicate that country is Portugal with 10 year bond yields of 6.92% compared with 8.31% in Ireland and 11.71% in Greece, which received rescue funds in May from the European Union and International Monetary Fund.

Portuguese Finance Minister Fernando Teixeira dos Santos has said there is a risk of contagion but that doesn’t mean the country will seek financial aid.

‘If Ireland reaches an agreement to tap the European Financial Stability Facility or some other mechanism to support its banking sector, I don’t think that will alleviate the pressure on Portugal. Portugal isn’t in the situation that it is now because of Ireland,’ said Steven Mansell, director of interest rate strategy at Citigroup Global Markets in London.

The government has forecast that economic growth in Portugal will slow to 0.2% in 2011 from an estimated 1.3% this year. Portugal has made less progress at taming its deficit than some of the other peripheral nations. In the first nine months, the central government’s deficit rose 2.3% from a year earlier. That compared with a decline of more than 40% in Spain and more than 30% in Greece.

While Portugal has no plans to sell more bonds this year, the market vigilantes drove up yields on its debt during the past month amid doubts about the country’s efforts to reduce the budget deficit.

Although Irish and Portuguese bonds probably would rise with a bailout agreement for Ireland, any gains wouldn’t change the underlying problems for peripheral Europe, according to Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank.

‘Wait a few weeks and the markets will just go for someone else, with Portugal at the front of the queue. The vigilantes pushed Ireland into the same situation Greece is in. Why would you conclude they won’t do the same to Portugal?’ he said.

Ireland’s debt crisis was triggered by the rising cost of bailing out the nation’s banks, including Anglo Irish Bank and Allied Irish Banks. While Portugal doesn’t face a crisis in its financial industry, it has a larger debt burden and the country has almost €10 billion of debt that comes due during the first half of 2011, data compiled by Bloomberg shows.

‘Portugal needs more cash than Ireland does because they go to the market on a regular basis. The market may move onto Portugal at some point because it’s significantly at risk,’ said Nick Firoozye, head of interest rate strategy at Nomura in London.

Ireland started to reduce spending in 2008 but Portugal has been slower to address its fiscal deficit, the fourth largest in the euro region, and the government failed to reach an agreement with its biggest opposition party on the 2011 budget plan until the end of last month.