PARIS (MNI) – Fears that Portugal could be the next Eurozone member
to restructure its debt drove up yields on the country’s sovereign bonds
Wednesday as the cost of insuring them rose to a record high.

Credit default swap contracts on Portugal climbed 62 basis points
to 1,240, signalling a 64 percent probability of default within the next
five years, according to the financial information firm Markit.

Yields on Portugal’s 2-year notes climbed 9 basis points to 15.24%,
while its 10-year bond yields rose 5 basis points to 14.30%.

Portugal’s debt rating was cut two notches last week by Standard &
Poor’s, removing its last investment grade rating among the three major
rating agencies. That forced investment funds not permitted to hold
junk-rated bonds to liquidate their Portuguese holdings.

Analysts said the continuing deterioration this week has stemmed
from worries that a disorderly Greek default could leave Portugal
exposed as the next most vulnerable EMU country.

“There has been some forced selling in the cash market, but a
bigger factor has been the uncertainty around the Greek PSI,” said Gavan
Nolan, director of credit research at Markit. “Portugal is the next
candidate for a restructuring.”

Talks in Athens to reduce the value of Greek debt held by private
investors by 50% resumed Wednesday, after being suspended on Friday.

Analysts said Portuguese bonds with maturities of seven years or
more are trading at around 50% of their par value. That compares with
around 25% for Greek debt. Both market are highly illiquid as most
international investors have fled.

“We’ve seen further evidence that Portugal is losing its investor
base,” said Peter Chatwell, interest rate strategist at Credit Agricole
CIB in London. “And jitters from Greece are also having an impact,” he
said.

The market declines come as Portugal’s economy continues to
crumble. The Bank of Portugal estimated last week that the country’s
economy would shrink by 3.1% this year, slightly more than the
government’s forecast of 3.0%.

And despite efforts by the European Central Bank to pump liquidity
into the European banking system, Portuguese bankers complain that
default fears are causing a liquidity crunch.

Ricardo Salgado, chief executive of Banco Espirio Santo recently
warned at a Lisbon conference that banks were facing a “brutal”
liquidity squeeze because of a lack of trust among them.

Reflecting those fears, the ECB reported Wednesday that banks
parked a record E528.18 billion in its overnight deposit facility on
Tuesday.

–Paris newsroom, +33142715540, jduffy@marketnews.com

[TOPICS: M$P$$$,M$$CR$,M$Y$$$,M$$EC$,MGX$$$,M$X$$$]