PORTUGAL surprised nobody when it became the latest of the debt riddled periphery Eurozone nations to go cap in hand to the EU in search of a bailout. The country’s interim government sought external aid after the bond auction on Wednesday sent the yields on 6 and 12-month bonds to new highs.
The Portuguese capitulation is a humiliation for both their interim government and for outgoing Prime Minister Jose Socrates, but the outcome was never really in doubt, only the timing. This uncertainty may have held back the Portuguese equity market. For the last 12 months we have seen a negative correlation between Portuguese equities and Portuguese bond yields. This is in common with the rest of the debt-ridden periphery euro-zone nations. The news of the bailout may offer short term gains for spread betters willing to dip their toes into the Portuguese equities market, but they should be wary of being bitten by something beneath the surface.
After the fall of its Iberian neighbour, the focus has shifted quickly to Spain’s much larger economy and to any indication of contagion. However it seems that Spain has largely managed to insulate itself from Portugal. Spain has given positive indications that it is on the road to overcoming its banking sector problems as well as balancing its budget and this has instilled market confidence and allowed them to de-couple their bonds from the debt-ridden Mediterranean region. Spain’s sale of 3-year bonds at an average yield of 3.57 per cent came in around the same mark as their previous sale a month ago, but with a bid-to-cover ratio of 1.79 versus 3.04.
Spanish equities could now offer a good buy, having been undervalued through fears that Spain could follow Greece, Ireland and Portugal to beg for a European bailout. According to Alex Bonnici, senior sales trader for WorldSpreads, there has been strong interest in the Ibex index and Spanish blue chip companies: “Spain is a very different economy to Portugal, and the problems with the Portuguese economy do not necessarily translate to Spain.”
WorldSpreads has been seeing renewed interest in its publicity-grabbing euro break-up price spread, whereby investors can take a position on how many days they believe the single European currency will survive in its current guise. As a result, it has moved its spread from 715-729 days to 690-700 days.
As Michael Hewson of CMC Markets puts it, “the prospect of cheap credit for Greece, Portugal, Italy and Spain seemed too good to be true. And it was. Now the cheque for the meal has arrived and these countries don’t have the ability to pay due to the extraordinary size of the debts involved.”
Help for Portugal won’t be the last bailout. It is a shame and something that the UK ought to try and not get dragged into. But Spain so far appears to have escapd contagion. The Iberian equities market thus looks a good punt for those who can pick a winner.