Bloomberg News

Portugal Not a Significant Risk to Euro Zone, Fitch Says

February 02, 2012

(Updates with bank exposure in the third paragraph.)

Feb. 1 (Bloomberg) -- Portugal doesn’t present the risk of default that Greece does to the rest of the European Union because officials there are seeking to contain the nation’s financial crisis, according to Fitch Ratings.

“The government there is committed and credible. The economy is highly indebted, but they are working on organizing a debt-for-equity swap,” David Riley, head of the sovereign-debt unit at Fitch Ratings, said at a conference in New York today. “That is the right strategy and in the near term we don’t see them as a significant risk to the rest of the euro zone.”

Banks in Germany, France, Belgium and the U.K. have the least periphery exposure to Portugal, excluding Ireland, among the debtor nations at the heart of the region’s financial crisis, according to data provided by Fitch at a presentation today. Riley wasn’t immediately available to elaborate on a possible debt-to-equity exchange.

Greek bondholders are being pushed to cede more ground after agreeing in October to take a 50 percent cut in the face value of more than 200 billion euros ($263 billion) of debt. European Union leaders are seeking the concession as the International Monetary Fund projects that Portugal’s gross domestic product will contract 3 percent in 2012.

Portuguese yields have fallen for two consecutive days after the 10-year yield closed at a euro-era record of 17.393 percent on Jan. 30. Riley attributed the rise to decision by Standard & Poor’s to follow Fitch and Moody’s Investors Service in downgrading Portugal’s credit rating to non-investment grade on Jan. 13.

Borrowing Costs Fall

Yields on 10-year securities tumbled 1.18 percentage points, or 118 basis points, to 15.22 percent at 12 p.m. in New York. Yields on Portugal’s two-year notes fell 176 basis points to 18.79 percent. The extra yield investors demand to hold 10- year securities instead of benchmark German bunds fell to 13.37 percent.

Portugal’s borrowing costs declined today at a sale of 750 million euros of bills due in July 2012 at an average yield of 4.463 percent. That compares with an average yield of 4.74 percent at a previous auction of similar securities on Jan. 18. The auction attracted bids for 2.65 times the amount sold, compared with a bid-to-cover ratio of 2.97 in January.

The nation’s debt agency, known as IGCP, also sold 750 million euros of three-month bills due in May at an average yield of 4.068 percent, attracting bids for 2.8 times the amount offered. That compares with an average yield of 4.346 percent at a previous auction of three-month bills on Jan. 18, and a bid- to-cover ratio of 4.1.

The Jan. 18 sale also included 1.25 billion euros of 11- month bills. The last time Portugal sold securities of that length was April 6, before the nation sought a rescue last year.

--With assistance from Anabela Reis and Joao Lima in Lisbon. Editors: Dave Liedtka, Dennis Fitzgerald

To contact the reporter on this story: Austen Sherman in New York at asherman18@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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