Irish, Portuguese Downgrade to Spark Rally

Thu, Jul 7, 2011 4:31
By Kevin Crowley & Anchalee Worrachate

Europe’s best-performing sovereign debt fund manager over the last decade, Sandor Steverink, correctly predicted Portugal’s downgrade this week and says Ireland will soon follow. Then it’s time to buy, he says.

Steverink, who is co-head of a team managing 26 billion euros ($37.3 billion) at Dutch insurer Delta Lloyd NV (DL), plans to buy Irish bonds once the ratings companies cut the debt to junk as Moody’s Investors Service did with Portugal on July 5. The extra yield investors demand for holding 10-year Portuguese bonds instead of the equivalent German bund surged yesterday to 10.13 percentage points, the most since at least 1997.

“What we’ve learned from emerging markets is that you get only a full recovery after a proper restructuring,” Steverink, 40, said in a telephone interview. “We think that’s necessary for Greece and, in the end, probably for Ireland and Portugal, too. We prefer Ireland above Portugal.”

Holders of Greek debt reaped the best returns of any sovereign-debt market in the two weeks after the government approved austerity policies and secured more European Union aid to pay creditors. Steverink’s Delta Lloyd Instl Obligatie LT fund has returned 5.8 percent a year since 2001, making it Europe’s best-performing euro-denominated government bond fund with more than 500 million euros of assets over the past three, five and 10 years, according to Morningstar Inc. Competitors at Aegon NV and Natixis SA say there are less risky ways to profit from Europe’s sovereign debt crisis.
Greek Rebound

Greek bonds returned 12 percent in a month after Standard & Poor’s slashed the country’s rating three steps to BB+, the top non-investment grade, on April 27, 2010, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek debt is today rated CCC, the lowest rating of any government in Europe. To read more article visit Bloomberg

Moody's cuts Portugal to junk, warns of 2nd bailout

Wed, Jul 6, 2011
By Andrei Khalip and Walter Brandimarte

LISBON/NEW YORK (Reuters) - Moody's became the first ratings agency to cut Portugal's credit standing to junk, warning the country may need a second round of rescue funds before it can return to capital markets.

The downgrade on Tuesday was not entirely unexpected and served as a reminder that Europe's debt troubles extend beyond Greece, which has dominated news headlines over its second financial bailout.

Some economists think Ireland may also need additional support, and investors worry Spain and Italy could be next in line for aid.

"It goes to show that this whole crisis isn't over just yet," said Jay Bryson, global economist for Wells Fargo Securities in Cape Hatteras, North Carolina. "Even if they cough up some more money for Greece, and that looks like it's a done deal, it's not over."

The protracted sovereign debt struggle has darkened the global economic outlook, cooling demand for Asia's exports and leaving financial markets on edge.

Mohamed El-Erian, co-chief investment officer for bond fund PIMCO, said it was unlikely that Europe's troubles would constitute a "Lehman moment" that paralyses the U.S. economy, but it was a drag on an already disappointing recovery.

The debt troubles add another wrinkle to the European Central Bank's interest rate decision on Thursday. Economists widely expect the ECB to raise its benchmark rate, which would be the second hike this year, to try to cool inflation.

But the move could raise already high borrowing costs for Portugal and other so-called "peripheral" European countries. Yields on long-term Portuguese government bonds are well above 10 percent, more than three times higher than those of Germany.

MISSING TARGETS

Moody's Investors Service slashed Portugal's credit rating by four levels, to Ba2, causing the debt-laden Iberian country to follow Greece into junk territory below investment grade. Greece is rated much lower, at Caa1.

Portugal in April became the third euro zone country to request a bailout, after Greece and Ireland.

Moody's cited heightened concerns that Portugal will not be able to fully meet deficit reduction and debt stabilization targets set out in its loan agreement with the European Union and International Monetary Fund.

Portugal is receiving funds from a three-year, 78-billion-euro EU/IMF bailout programme and does not need to issue long-term debt in the market until 2013.

But Moody's said there is an increasing probability Portugal will not be able to borrow at sustainable rates in capital markets in the second half of 2013 and for some time thereafter.

There was a "growing risk that Portugal will require a second round of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a pre-condition," Moody's said.

Of the three major ratings agencies, Standard & Poor's and Fitch Ratings both have Portugal at BBB-minus, the bottom of the investment grade range.

The first repercussions of the downgrade could come as early as Wednesday, when Portugal is due to place up to 1 billion euros in a 3-month Treasury bills auction. It may have to pay a higher premium to entice buyers.

Portugal's new centre-right government said in a statement that Moody's did not take into account strong political backing for austerity after a June 5 election, and an extraordinary tax announced last week.

"BIT EXTREME"

Unlike the previous minority Socialist government, the new ruling coalition has a comfortable majority in parliament to pass austerity measures and reforms. It did acknowledge, though, that the rating cut "shows the vulnerability of the country's economy amid a debt crisis."

It also reaffirmed commitment to deepening and speeding up austerity measures that the country vowed to implement under its bailout pact, saying a strong macroeconomic adjustment was "the only way to reverse the course and restore confidence."

The country has to slash its budget deficit to 5.9 percent of gross domestic product this year after overshooting its target last year, when the gap was 9.2 percent, and then reduce it to 3 percent by the end of 2013.

Anthony Thomas, Moody's analyst for Portugal, told Reuters "evidence that Portugal is meeting or indeed exceeding its deficit reduction targets" could be a positive that may lead the agency to change its outlook on the country's credit rating to stable from negative.

But he also said the outlook depends a great deal on whether euro zone officials will require private-sector participation when extending new financing to the region's troubled countries. Right now, such participation is planned to be only voluntary so as not to cause ratings agencies declaring it a "credit event."

Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said Moody's move was "a bit extreme" and was likely to exacerbate concerns over Portugal's debt.

"The capacity to return to the markets after a while depends on a more global, structural solution by Europe rather than on what each troubled country does. I think it's too early to think of a second bailout for Portugal right now, not this year at least," he said.

Garcia said the ratings agencies were not taking into account the European Union's political determination to avoid a euro zone member's default, despite the union's strong support for Greece, which is in a far worse shape than Portugal.

"Either they don't believe in the power of the political will by the European Union to avoid default, or they are underestimating this political union," he said. (Reuters)

Portugal asks for EU financial aid

Fri, April08, 2011
English.news.cn 2011-04-08 08:25:30

LISBON, April 7 (Xinhua) -- Portugal will ask Thursday for the EU financial aid, said the minister for the presidency of the council of ministers, Pedro Silva Pereira, at the end of the weekly government meeting.

However, Pereira did not specify the amount Portugal will ask for.

"This will depend on the negotiations the government will have with the European authorities. The request the Portuguese government will send to the European Commission and the dialogue we will have with them will establish the instrument and the amount that will be used," he said.

According to the minister, the European Union (EU) authorities and the European Central Bank already expressed their availability to send a joint team to Portugal to start the negotiations.

Due to the fact that Portugal will have general elections in June 5 and the government can not commit the country after that date, the solution should be a short term loan until the new government would be inaugurated. ByXinhua

Portuguese debt rating downgraded by Fitch

Fri,Mar25, 2011 11:24:53 English.news.cn

LISBON, March 24 (Xinhua) -- Fitch credit rating agency Thursday downgraded Portuguese debt to A- from A+, saying risks to the country's economy rose after the parliament failed to pass an austerity measure and the prime minister stepped down.

According to the rating agency, Portugal can no longer afford to maintain market access to refinance its sovereign debt this year. The Portuguese banks will face a peak in their refinancing needs of about 45 billion U.S. dollars in April.

Wednesday's decision at the parliament has led to a record high of the Portuguese yield. The interest rate of Portuguese 5-year bonds climbed to 8.339 percent in the secondary market Thursday, and 10-year bonds rose to 7.695 percent, reaching a record high since the country entered the eurozone.

Portuguese Prime Minister Jose Socrates resigned Wednesday night after the country's parliament voted against his new round of austerity measures aimed at reducing a high budget deficit to avoid a bailout.

The Portuguese government announced a series of adjustment measures during the past year to underline its commitment to reducing its budget deficit from 7.3 percent of gross domestic product in 2010 to 4.6 percent in 2011.

(Xinhua)

EURO GOVT-Portuguese yields hit records as bailout chance grows

Thu Mar 24, 2011 6:11am EDT
* Irish margin hike, Spain bank downgrade add to periphery woes * Wider contagion limited for now; Spain, Italy hold up

By Kirsten Donovan

LONDON, March 24 (Reuters) - Portugal's government bond yields hit new highs on Thursday after parliament rejected new austerity measures and the prime minister resigned, increasing expectations that Lisbon will need a bailout sooner rather than later. Heaping more misery on the euro zone's periphery, Moody's cut the ratings of 30 Spanish Banks and clearing house LCH.Clearnet raised the margin it charges on Irish government bonds.

All this comes before a European Union summit on Thursday and Friday that had been expected to draw a line under the region's woes but now looks increasingly unlikely to make major progress.

Portuguese PM Jose Socrates quit after Parliament rejected his government's latest austerity measures, adding to uncertainty with the country already widely expected to need financial assistance.

"The wild card here is the European Central Bank. If they don't get involved then you want to be short Portuguese bonds, but if they do start buying bonds in the current thin market then you're going to get hurt very quickly if you're short," said Nomura rate strategist Sean Maloney.

Portuguese borrowing costs -- with 10-year yields now above 7.9 percent and 5-year yields at 8.5 percent -- are seen as unsustainable, but the country faces 4.8 billion euros of bond repayments in April followed by 6.95 billion euros in June, according to Reuters data.

Rabobank strategist Richard McGuire calculates that Lisbon must still raise a further 1.45 billion euros to meet the first redemptions and almost 10 billion euros to fund itself through to the end of June.

An EU source said on Thursday that Portugal was unlikely to ask for a financial bailout package during the summit although it could not be ruled out.

RBS analysts said accessing emergency funding would see Portugal's ratings cut to the triple-B level, while bond yields would likely converge to Irish levels.

"Countries at the begging bowl of the IMF/EFSF over many years cannot be assumed to remain compliant (with requirements), and so the default risk assessment will remain surprisingly high for a surprisingly long time."

The uncertainty gave German Bunds an early bid with June futures FGBLc1 at one point up as much as 44 ticks at 122.74 but emerging buyers of Spanish and Italian paper -- suggesting a wider peripheral blowout was unlikely -- calmed the safe-haven bid leaving Bund futures flat on the day around 122.30.

"People were bearish at the open on the Portugal story but the reality is that that's been touted for the last few days and the fact they need a bailout isn't new, so maybe some people look to take profit on the initial knee-jerk reaction," a trader said.

Two-year German bond yields DE2YT=TWEB were 3 basis points lower at 1.668 percent, with 10-year yields DE10YT=TWEB down half a basis point at 3.23 percent.

Irish bonds also remained under pressure ahead of an EU summit which is unlikely to renegotiate the terms of the country's international bailout.

But Spanish and Italian paper held up well on Wednesday and outperformed other peripherals on Thursday, suggesting wider contagion remains limited for now.

The Credit default swap curves show how investors are currently pricing in different scenarios for Spain and Portugal, with the Spanish curve retaining a "normal" shape but the Portuguese curve peaking around the 3-year mark.

Commerzbank strategist Marcel Bross said the crucial issue for Spain, Italy and Belgium now is whether the EU will take decisions that will keep the risks in Greece, Ireland and Portugal from spilling over.

"We feel that the spread tightening leg in large peripherals is still intact and expect the de-coupling trend of Greece, Ireland and Portugal from large peripherals to continue."

However, EU leaders also look set to disappoint investors by delaying any approval of a beefed-up euro zone rescue fund till June. (sourced :Reuters)

Tags : German Bunds, debt crisis, RBS analysts, triple-B, EU summit, Rabobank

GLOBAL MARKETS-Euro, crude ease on Portugal debt worries

Thu Mar 24, 2011 6:50am GMT

* Portugal bailout appears likely after PM resigns

* Nikkei down 0.2 percent, MSCI Asia ex-Japan up 0.9 percent

* U.S. stocks rise modestly on back of base metals gains

* Euro falls below $1.41, yen sits around 81 per dollar

* Oil eases 0.2-0.3 percent, gold steady near record (Fixes format of bullet point)

By Alex Richardson

SINGAPORE, March 24 (Reuters) - The euro fell and oil eased on Thursday after Portugal's prime minister resigned following parliament's rejection of his minority government's austerity programme, renewing worries about the scale of the euro zone's sovereign debt crisis.

Asian stocks outside Japan rose as higher commodities prices lifted materials shares, but Tokyo shares weakened as concerns over radiation leaks from an earthquake-damaged nuclear power plant continued to sap investor confidence.

European shares were expected to open little changed as uncertainty over Portugal, Japan and the Middle East gave investors little incentive to stake out fresh positions, while U.S. S&P 500 futures barely budged, pointing to a cautious start on Wall Street as well.

The resignation of Prime Minister Jose Socrates was seen as increasing the likelihood that Portugal will join Greece and Ireland in requiring a bailout from the European Union.

An official euro zone source estimated in January that if Portugal asked for international aid, it might need between 60 billion to 80 billion euros (up to $113 billion).

"Whether there will be a bailout for Portugal or not has some consequences on how things will pan out in Europe. Risks in the euro-zone seem to be increasing," said Serene Lim, a Singapore-based oil analyst at ANZ Bank.

Tokyo's Nikkei fell 0.2 percent. It remains 8 percent below its close on March 11, when a 9.0 magnitude earthquake and tsunami hit northeastern Japan, leaving around 25,600 people dead or missing and cutting power to millions of homes as well as factories, many of which are still struggling to come back online.

The estimated $300 billion in damage makes it the costliest natural disaster in history, and Japan is still grappling with the worst nuclear crisis since Chernobyl after the quake and tsunami crippled a power plant 240 km (150 miles) north of Tokyo.

"We are unlikely to see further gains in the near future, unless there's an end to the nuclear crisis in sight," said Takashi Hiroki, chief strategist at Monex Securities.

Disruptions in the global supply chain after the Japan quake continue to be felt around the world, most notably for auto makers and electronics firms. Toyota Motor said overnight it will slow some North American production because of parts shortages.

MSCI's measure of Asia Pacific shares outside Japan rose 0.9 percent, with Australia's resources-heavy index gaining 1 percent after a rally in prices of base metals such as copper the previous day.

Gains for materials shares lifted Wall Street on Wednesday, with the Dow Jones industrial average rising 0.6 percent and the broader S&P 500 gaining 0.3 percent.

DEBT CRISIS

The political upheaval in Portugal, along with looming elections elsewhere, was expected to deter European leaders from taking tough decisions to address the region's sovereign debt crisis when they meet at a summit this week.

They are unlikely to come up with a plan to strengthen the euro zone's bailout fund until June, which may also undermine the single currency.

"If the EU leaders fail to come up with measures to enhance the safety net that markets have wanted in their summit meeting, the euro could face further pressure down the road," said Sumino Kamei, senior currency analyst at Bank of Tokyo-Mitsubishi UFJ.

The euro bought around $1.4085 , having dropped as far as $1.4075 on electronic trading platform EBS in late New York trade on Wednesday.

The yen sat near 81 per dollar, a level it has hugged tightly in recent days with markets still wary of further central bank intervention to curb the Japanese currency if it strengthens past 80.50.

Leading central banks launched the first coordinated market intervention in more than a decade last week to reverse a run that had seen the yen hit a record 76.25 on expectations Japan -- a net creditor to the rest of the world -- would see a wave of funds being repatriated to pay for earthquake reconstruction.

Japanese government bonds rose, with benchmark 10-year futures up 0.19 point, while the 10-year yield eased 1.5 basis points to 1.2 percent.

Oil eased as the euro zone concerns rekindled worries about economic growth -- and hence energy demand -- in the bloc, although traders said continued political unrest in parts of the Middle East would prevent it from falling far.

U.S. crude fell 0.3 percent to $105.48 a barrel and Brent crude was off 0.2 percent at $115.35.

Spot gold traded around $1,437.90 an ounce, in sight of its record $1,444.40 set earlier in the month. ($1 = 0.707 Euros) (Editing by Kim Coghill,sourced:Reuters)