Global Economics

Investors Are Getting Hungry for PIGS Debt Again


Mario Draghi, president of the European Central Bank (ECB), at the bank's headquarters in Frankfurt on Jan. 9

Photograph by Ralph Orlowski/Bloomberg

Mario Draghi, president of the European Central Bank (ECB), at the bank's headquarters in Frankfurt on Jan. 9

(Corrects spelling of Jacopo Ceccatelli in the fourth paragraph)

Europe’s having a bond rally, and the PIGS are playing host. Portugal, Ireland, Spain—and even Greece, where Europe’s debt crisis began—are heading back to the bond markets and enjoying their lowest borrowing costs in years, as investors appear reassured that the region’s sickest economies are on the mend.

Portugal today held its first sovereign-debt sale in eight months, as yields demanded by investors on its five-year benchmark bonds fell to 3.9 percent, the lowest since August 2010. Ireland raised €3.75 billion ($5.1 billion) in a bond sale this week after completing a three-year bailout program, while Spain today auctioned five-year bonds with a 2.38 percent yield, the lowest on record.

Greek Finance Minister Yannis Stournaras yesterday suggested that the country may begin auctioning five-year notes later this year. Greece has been shut out of bond markets since early 2010, but the yield on its 10-year bonds is now 7.63 percent, down from a peak of more than 44 percent in March 2012.

“We are gradually moving from fear to greed,” Jacopo Ceccatelli, a London-based partner in the financial advisory and asset management firm JCI Capital, tells Bloomberg News. “The reduction in the risk perception, and this sort of market euphoria, is leading to a rerating of sectors and countries most penalized during the sovereign debt crisis.”

Fund managers say that European Central Bank President Mario Draghi’s 2012 promise to “do whatever it takes” to save the euro continues to reassure investors, and Draghi today reaffirmed his pledge to keep interest rates low for as long as necessary. “The Governing Council strongly emphasizes that it will maintain an accommodative stance of monetary policy,” he told reporters in Frankfurt after the bank kept its key refinancing rate at a record low 0.25 percent. Draghi said he was encouraged by signs that the region’s recovery had “gone from being based exclusively on export growth” to “very gradually extending into domestic demand.” But, he said, “It’s still premature to declare any victory.”

Indeed, there’s a risk that the euphoria could get out of hand. After all, the euro zone economy is forecast to grow only 1 percent this year, compared with 2.6 percent in the U.S., and unemployment across the zone is about 12 percent. “Austerity measures are still sapping growth for the likes of Italy and Greece, while the French government’s inability to spur growth via fast-acting and effective reforms, are all reasons to be wary of the euro area this year,” says Ishaq Siddiqi of ETX Capital in London.

For now, though, the debt party looks set to continue. “Portugal will have no problem raising the remaining funds it needs this year from the bond markets,” strategist Justin Knight of UBS (UBS) in London writes in a note today to clients.

“People are generally upbeat,” AllianceBernstein’s (AB) Loughney says. “Fundamentally there are still significant issues, but it looks as though the ECB’s friendly stance will continue for the foreseeable future.”

Matlack is a Paris correspondent for Bloomberg Businessweek.

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