5 things you need to know about the growing turmoil in Portugal July 3, 2013, 11:08 AM

Politicians in Lisbon apparently didn’t get the memo declaring the euro-zone debt crisis over. The long-dormant drama re-awakened this week, with Portuguese bond yields soaring to alarming levels as the country’s government teetered and investors pondered the possibility Lisbon could require another bailout. European markets were hit hardest, but U.S. and other investors will watch closely. Here’s what you need to know:

What exactly is going on?

It started Monday with the resignation of Vitor Gaspar, Portugal’s finance minister, austerity advocate and architect of the country’s international bailout. The country’s foreign minister, who heads one of the party’s in the coalition government of Prime Minister Pedro Passos Coelho, followed suit on Tuesday, stoking calls for early elections. Coelhos is resisting, but markets fear some renegotiation of the bailout terms or even a second rescue that could hit bondholders may eventually be in the works.

Andrew Wilkinson, chief economic strategist at Miller Tabak, notes that the turmoil marks an unfamiliar turn for Portugal, which has long been viewed as the “good citizen” of the euro-zone drama.

What does it mean for European markets?

Portugal was ground zero, of course. The bid yield on the 10-year government bond topped 8% for the first time since last November (see chart above) while the bond recently traded at a yield near 7.69%, according to Tradeweb. If Portugal weren’t already in a bailout program, that would raise big questions about its ability to fund itself. More worryingly, borrowing costs for other stressed euro-zone countries, including Italy and Spain, continued to rise, though they so far remain far off crisis levels.

European stocks tumbled, while Portugal’s main index dropped nearly 6%.

Will this finally trigger the European Central Bank’s OMT program?

Probably not. According to the ECB’s own guidelines a country must be “regaining market access” in order to qualify for the program of potentially unlimited short-dated bond buys. While the ECB’s guidance has been “a little blurry,” it’s unlikely that Portugal, despite having issued some new debt his year, would qualify, say analysts at Danske Bank. They note remarks by ECB President Mario Draghi in March, who said:

Countries should be in the market under their own steam. To be in the market, I think I clarified what we mean: being able to issue along the yield curve, being able to issue to a fairly broad category of investors, and being able to issue certain quantities.

That’s a test Portugal doesn’t yet meet, they say.

What does this mean for U.S. markets?

U.S. stocks were under pressure, but stock-index futures had trimmed initial, Portugal-inspired losses after a round of stronger-than-expected private-sector jobs data from ADP and initial weekly jobless claims from the Labor Department. For now, expect investors to keep one eye on Europe, though the main focus is likely to remain on U.S. economic data, particularly Friday’s June nonfarm U.S. payrolls figures, and what it means for the Fed’s monetary stimulus efforts.

That said, Portugal’s latest round of turmoil combined with mounting unrest in Egypt are set to increase uncertainty, “which the market does not like generally, but certainly not now” with the Fed signaling it’s set to seek the normalization of interest rates, said Steen Jakobsen, chief economist at Saxo Bank. The prospect of slower Fed stimulus has served to boost bond yields around the world, including the euro-zone’s troubled periphery.

What does it mean for commodities?

The dollar index DXY -0.40% is under pressure Thursday, reversing some of its recent gains on ideas political turmoil could unseat the Fed’s tapering plans, observes Miller Tabak’s Wilkinson.

“Gold, copper and crude oil prices are each holding their own as investors have a rethink about the prospects for the greenback on the back of a volatility spike,” he said.

– William L. Watts

Follow The Tell @thetellblog

Follow William @wlwatts

One thought on “5 things you need to know about the growing turmoil in Portugal July 3, 2013, 11:08 AM

  1. Pingback: Portugal stock market falls amid uncertainty | anonymatter - Anonymous do Matter - News

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