London/Lisbon - Portugal’s slide towards becoming the next Greece - needing a second bailout to avoid chaotic bankruptcy - geared up a notch on Monday as untrusting underwriters hiked the cost of insuring Lisbon’s bonds to new highs and insisted it be paid up front.
Business and consumer confidence also hit record lows, the latter battered by the lower salaries and across-the-board tax hikes that were part of Portugal’s painful austerity programme.
Banks and others offering default insurance to holders of Portuguese sovereign debt have begun demanding huge up-front payments rather than allowing costs to be spread over the term of the contract.
On Monday, this meant that it cost a whopping €3.95m euros to insure €10m in bonds over five years, payable now. It made Portugal the second-highest sovereign to insure in the world, after Greece, and implied a huge lack of confidence in market circles about Lisbon’s future.
Portuguese bonds have come under particularly intense pressure from investors after Standard & Poor’s downgraded 15 eurozone countries earlier in January, putting Portugal in the “junk” category.
That shuts it out from tapping capital markets in the forseeable future and makes its task of meeting future debt repayments tough. Portugal’s already soaring 10-year bond yields surged on Monday to just under 16 percent, more than twice the level that is generally considered unsustainable.
This all adds up to expectations that Lisbon will have to get a second bailout from the European Union and International Monetary Fund to go with the €78bn package it has already been handed.
There is also increasing concern that Portugal will be forced to restructure its debt like Greece, even though its debt levels of around 105% of gross domestic product are much lower than Greek ones. Lack of confidence
The decline in business and consumer confidence reflected both Portugal’s dire economic condition and the pain of austerity imposed as a condition of the first bailout.
The economic climate indicator, which measures business confidence, slumped to minus 4.7 in January from minus 4.4 in December, the National Statistics Institute said. A year ago it stood at plus 1.6.
INE said its consumer confidence indicator fell to a negative reading of 57.1 in January - also the lowest on record - after minus 56.8 in December.
“For consumers, we couldn’t expect anything else, the start of the year brought more unemployment and higher taxes and obviously that is reflected in confidence,” said Filipe Garcia, economist at Informacao de Mercados Financeiros.
Meanwhile, the demand for so-called up-front payments on bond insurance policies, or credit defaults swaps (CDS) showed a growing distrust among banks of Portugal’s ability to pay its debts.
Prices are quoted up front when they reach extreme levels and require the buyer of protection to pay a single lump sum instead of annual premiums.
Up-front payments for Greece began in September last year.
If quoted on a normal annual payment basis, the CDS premium on Portugal would be around 1 428 basis points, or €1.4m a year for €10m in insurance.
That compares to just 90 basis points or the equivalent German bond insurance.
But the banks want it up front now.