It is exactly two years since Portugal exited the European Union bailout program. But after a period of promising recovery, the country’s economy is again deteriorating. The government in Lisbon is struggling with a mixture of high taxes, low growth, and unstable banks.
That explosive mixture is making investors nervous. Last week, Fergus McCormick, sovereign bond expert at the ratings agency DBRS, set off panic selling of Portuguese debt when he said in an interview that low growth figures in the second quarter had “raised our concerns about growth prospects, which appear to be slowing into the third quarter.” In response, yields on 10-year bonds leaped up 13 basis points, their biggest jump since June’s Brexit vote. Pressure continued all week.
Of course, Mr. McCormick was only making explicit what everyone already knew. But the DBRS agency has particular significance for Portugal: it is the only rating agency which still rates the country’s debt as “investment grade.” And that rating is the precondition for the bonds to be eligible for the European Central Bank’s bond buying program. If the ECB were to stop buying Portuguese bonds, the country would face considerable problems in financing its debt.