Portuguese bonds in biggest post-crisis rally after S&P upgrade

Portuguese bonds in biggest post-crisis rally after S&P upgrade

Portuguese bonds staged their biggest rally in more than seven years on Monday after the country won back its investment-grade credit rating, marking one of the most significant milestones in the currency union’s return to fiscal health. Portugal had been in junk territory since 2012 after it became the third eurozone country forced into an international bailout, receiving a €78bn rescue from the International Monetary Fund and EU after Greece and Ireland were subjected to similar programmes.

At the height of the crisis, yields on Portugal’s benchmark 10-year bond nearly touched 16.5 per cent and eurozone officials worried Lisbon would be forced into a second bailout because it would be unable to finance its debt in the private market without exorbitant borrowing costs. On Monday, the yield dipped 36 basis points to below 2.5 per cent — its biggest fall since May 2010. Bond yields fall when prices rise. Portugal has long been viewed as the second weakest eurozone economy, behind only Greece, and the S&P seal of approval is the strongest indication to date that markets believe Lisbon has put its fiscal problems behind it, despite a debt pile that is 130 per cent of economic output — behind only Greece and Italy. Portuguese and other weaker eurozone economies have been boosted by the European Central Bank’s €60bn-per-month bond-buying programme, which has kept borrowing costs of all countries in the currency bloc low. The ECB is expected to announce a schedule to end the programme next month.

In making its upgrade, S&P, which is the first major rating agency to lift Portugal out of junk status, cited a “significant decline” in external financing risks and an increase in its average growth forecast for 2017-2020 to 2 per cent, up from 1.5 per cent. António Costa, Portugal’s prime minister, said his minority Socialist government had “turned the page on junk status”, a reference to an earlier campaign pledge to “turn the page on austerity”. Opponents said a centre-right administration would have achieved the upgrade faster.

Financial Times

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