Portugal’s downward spiral

Portuguese bond yields have hit euro-era highs following a downgrade to junk status by ratings agency Standard & Poor's. How big a hit will bondholders have to take to avoid a default?

Fears of defaults in southern Europe have eased of late, with one exception Portugal. There, yields have hit new euro-era highs as investors have sold off government debt. The ten-year yield is more than 17%, up 4% this year alone. Prices of credit default swaps imply a 70% chance of default over the next five years. Yet Portugal received a €78bn bail-out from the eurozone only last year.

The immediate concern is a recent downgrade of Portuguese debt to junk levels by Standard & Poor's. This pushed the country out of benchmark bond indices, forcing funds to ditch its debt. The basic problem is that investors "clearly believe that, like Greece, Portugal will soon need to impose a significant haircut on bondholders", says FxPro.com.

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