Crunch Time for Portugal and the Eurozone Just Weeks Away

If you are looking for further evidence as to just how bleak the outlook is for Portugal, consider this – it costs more for Portugal to borrow for six months, than it does Germany for thirty years.

Consider also that the yield spread between Portugal’s debt and the benchmark German bunds continues to widen with each passing day and on Tuesday, the spread surpassed a whopping 636 basis points. This is the highest spread for Portuguese debt since the formation of the Eurozone region and the subsequent adoption of the shared euro currency.

As a result, Portugal’s two-year bond yield climbed to 11.74 percent, while the ten-year yield rose to 9.61 percent. This is a dramatic increase and as recently as of the end of March, the two-year yield was about two hundred basis points lower at 8.78 percent, while the ten-year yield was 8.41 percent.

Adding to the perplexity of the situation is Portugal’s latest revision to last year’s deficit. This latest amendment has once again revealed the actual deficit to be greater than originally reported and is now pegged at 9.1 percent of the country’s Gross Domestic Product compared to the 8.6 percent figure announced previously.

All this is taking place against the backdrop of a fresh round of meetings in Lisbon where representatives from the European Central Bank, European Union, and the International Monetary Fund are attempting to hammer out a bail-out plan that would permit Portugal to meet its growing debt obligations. Time is becoming more of an issue, however, as Portugal has two key repayment dates looming on the horizon. The first of these is scheduled for June 15th when it is required to repay nearly five billion euros (US$7.3 billion), with a similar amount due in October.

Portuguese Prime Minister Jose Socrates – who resigned last month after failing to win approval to cut government spending – will be replaced in elections scheduled for June. As one of his last acts as Prime Minister, he has called for a bailout plan to be in place by mid-May. While he has not said so explicitly, the implication is that without this emergency funding, Portugal will be unable to meet the June bond repayment date.

Scott Boyd is a currency analysts and a regular contributor to the OANDA MarketPulse FX blog.