Portugal seems set to be the worst casualty from higher bond yields

This morning has seen one of my recent themes continue to rumble around markets. The effect of the likely fiscal expansionism from President Trump that I discussed on the 9th of this month has continued for the US bond market. This morning we have seen a big figure change as the US Long Bond ( 30 year) yield has nudged over 3%. If we go back to the 9th it was doing this.

There has been a clear market adjustment to this which is that the 30 year ( long bond) yield has risen by 0.12% to 2.75%.

This has a clear economic impact as some US fixed-rate mortgages in essence track this rate so we will see higher quotes for them. Other US yields have risen too and this has driven yields abroad higher as well as for example the 30 year yield in Germany hit 1%. If we look at the UK there has been quite a change of tone for the UK Gilt market as Micheal Hewson has pointed out.

UK Gilt yields now at pre Brexit levels 1.433%

He means the benchmark 10 year Gilt. This leaves Bank of England Chief Economist Andy Haldane in something of a quandary as you see he promised a “sledgehammer” of monetary action but instead has spent some £33 billion on QE (Quantitative Easing) Gilt purchases to find he has put the UK taxpayer on this.

We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride

No doubt Bank of England Governor Mark Carney will be along to explain how yet again Forward Guidance looks like one of the “cunning plans” so beloved of Baldick of the TV series Blackadder.

Pain for Portugal

Not much pain is to be seen in the media as I note today it is full of reports of Christiano Ronaldo’s 2 goal haul and penalty miss. But you see the bond market tantrum has meant that the ten-year yield in Portugal is now 3.67%. A while ago the financial media were very concerned about it passing 3% but now a fair bit higher number is mostly passing unnoticed! If we move to intra Euro issues then there is a significance in the fact that it is well over 3% higher than the same maturity of Germany ( 3.31%).

This yield is in spite of the fact that up to the end of last month the ECB had purchased some 22.9 billion Euros of Portuguese Government Bonds.

The National Debt

This is an issue for Portugal as the Bank of Portugal describes in its latest Monthly Bulletin.

At the end of the first half of 2016, the public debt-to-GDP ratio stood at 131.7 per cent (121.8 per cent of GDP, excluding central government deposits), after reaching 129 per cent at the end of 2015 (121.6 per cent of GDP, excluding central government deposits).

Remember when the Euro area established a ratio of 120% for this metric on the early days of the Greek crisis? They must have regretted that very much as Italy and Portugal cruised by it. It is also revealing when you get a different number which of course is always lower but means using a different set of rules to the benchmark! As ever the official view is that the number is about to fall and to 124.8% but even the Bank of Portugal calls that “particulaly demanding”.

Fiscal problems

If we look at the numbers in relative and indeed comparitive terms the deficit is not large. From the Bank of Portugal.

, the general government deficit stood at 2.8 per cent of GDP in the first half of 2016, compared with 4.6 per cent in the same period of the previous year.

The catch is that it comes on top of the national debt and worryingly not with the revenue growth hoped for.

In the first half of 2016 total revenue grew, yearon-year, by 1.7 per cent, which was significantly lower than the yearly projection (3.3 per cent),

Also you may note that Portugal is still under the Euro area austerity program at least implicitly and the switch to fiscal expansionism seems to have by-passed it.

Economic Growth

This is a road which so often seems to start hopefully as Venture Beat illustrate here.

As Web Summit arrives in Lisbon, Portugal tries to seize its startup moment with $220 million fund

Let us hope so although the reports of  this will not have helped much. From @InsurgentPT

Portugal organizes #WebSummit. Wi-fi connection fails in the first day. Investors might not be impressed

In a way it always seems to turn out like that as hopes fade and growth at best ends up of the order of 1% as this from the Bank of Portugal shows.

Projections for the Portuguese economy point to a deceleration in GDP, from 1.6 per cent in 2015 to 1.1 per cent in 2016.

It blames “idiosyncractic structural constraints” which is odd after all the reforms we were told ( Remarkable progress according to Mario Draghi) have happened isn’t it? Actually this is especially worrying for those who have proclaimed reform.

The pace of growth in economic
activity has stood below that of previous
business cycles, namely affected by high levels
of indebtedness in the public and private sectors,
adverse demographic developments and
a macroeconomic environment characterised
by relatively weak external demand dynamics.

So worse rather than better? This poses more than a few questions when we note that the Euro economic experience for Portugal has been dogged by slow economic economic and that is in the better times.

As we look for reasons some can be bad luck as for example there were times that the large Volkswagen plant in Portugal would only bring good economic news. But the problems of corruption and cronyism in the banking sector has not only affected the national debt as more and more bailout have taken place but it has left the banks unable to support economic growth. There is something of a trap here as the weak banks struggle with non-performing loans but not supporting the economy only leads to them being more of a problem. Also Portugal’s businesses are rather indebted according to the Economist.

Investment is being stifled by the weight of the corporate sector’s debt, which is close to 140% of GDP.


We need some nuance and sense of scale here as the bonds yields of today are nothing like the 17/18% seen in Portugal before it called for a bailout.  But they do pose problems as the fiscal windfall from lower bond yields invariably gets spent which is awkward when it fades. Also what happened to the economic growth from the windfall? This is a familiar theme as remember when Novo Banco was translated as New Bank and then turned out to be “meet the new boss,same as the old boss”?

Novo Banco’s legacy assets, however, turned out to be worse than expected, making it virtually impossible that the lender will be sold for anywhere near the €4.9 billion ($5.46 billion) capital injection it received. ( Wall Street Journal)

There are five bids for it again as we wonder how much they will pay for a bank who has just made a profit but of only 3.7 million Euros.

On the other side of the ledger there have been gains in Portugal as for example the unemployment rate has fallen to 10.5%. If the Algarve Daily News is correct maybe it needs find a way of reducing the undergorund economy.

Portugal’s grey economy, the parallel under-the-counter trade in goods and services, remains buoyant, reaching over 27% of the nation’s Gross Domestic Product last year.

The un-taxed economy, which keeps many from poverty despite its illegality, is running at the highest percentage since 2010……Portugal leads many of its peers too as the OECD average grey economy is just 16.4% of GDP.

Wasn’t this supposed to be another example of reform? Against that even a Euro below 1.08 versus the US Dollar will not help that much.

Also let me give my best wishes to those on South Island in New Zealand after the weekend earthquake.






16 thoughts on “Portugal seems set to be the worst casualty from higher bond yields

  1. I think that the above article can be summarised as:
    1. Despite all the “helpful measures” taken by the Euro elite, Portugal is bust;
    2. The state sector is really bust and is never going to repay the debt;
    3. The corporate sector is bust, with 140% of GDP as debt;
    3. The banks are also bust;
    4. The black market is the one bright spot;
    5. There is no plan to deal with any of the above.
    We could always rename the current set of policies as the Micawber strategy, which I believe was encapsulated in the phrase “Something will turn up”

  2. Shaun,
    Good one, as usual!
    I know its early days, but are we seeing a period of rising bond yields? If we are, there are going to be some problems in the future – that saying about, you can tell who’s wearing bathing trunks when the tide goes out?

    • Hi Foxy and thanks

      Yes I suspect we have but I expect this to come in waves. What I mean by this is that I expect at least some of the main central banks to increase their QE bond buying efforts. I have written before that I do not expect the ECB to taper its efforts and I think it will extend it and may be tempted to up its rate. Any weakness in the UK economy and the Bank of England could try to do more QE in addition to the £27 billion left in the current phase. Also there are roads forwards where the US Federal Reserve could raise interest-rates and restart QE. How far they can drive it is difficult to say………..

  3. undergorund economy

    of course this is why the Banks need to ban cash

    eventually the UK citizen will wake up to this a well but long after they can do anything about it

    as far as rising yields go perhaps this is the markets realization that Germany really can’t bail out the rest of Southern Europe …..

    I can’t see Germany leaving the Euro because it is the Euro (!) but I can see them electing a more tougher leader than Merkel. A cold wind will then follow through Southern Europe…..

    Interesting times


    • Electronic money can easily be frozen and/or re-denominated to the depositors disadvantage.

      Traditionally, lenders would force bond issuers to pay higher yields when debt-toGDP went up or repayment looked less likely. QE has been temporarily obscuring that signal, this won’t last for ever…..

      Rising bond yields historically triggered austerity and tough times. When the correction does come, it may be a big one.

      • “QE has been temporarily obscuring that signal, this won’t last for ever…..”

        Yes…but…Govts/CB’s may decide to start monetising debt with the moral hazard which would accompany that. Given the very low level of money velocity these days a different outcome to that of the Weimark may occur.

        I’m fascinated to see what they come up with next as we are about to see a spurt in global nominal growth accompanied by an inflationary spurt next year which may cancel out the growth. Whichever way it goes, increasing global inflation which WILL happen next year will put further upwards pressure on yields,

        They may yet come up with something no one thought of.

  4. Good analysis Shaun, and all of this news can only lead us to conclude one thing… crystal clear evidence, despite the retirement of Senhor Barosso, there is no doubt whatever that Portugal remains “on track”…

    It does not seem to have occurred to the experts that the track leads over the edge of cliff, but hey!

  5. The Euro exchange rate is mismatched to Portugal’s economy. I suspect the population of Portugal, Greece, Italy etc continue to want a Euro that hurts them, because they know that the poor get the worst of depreciation and suffer the most from a weak currency.

    • Hi ExpatInBG

      I think that those in the states you mention still hope that they will get better government from Europe than they will from their own politician and establishment. So far they have been disappointed overall I think and I wait to see what Italy votes for next month. Meanwhile is a wind of change blowing through Bulgaria?

      • Same as it ever was, the new ruling party isn’t going to bring constructive social change – they’re only interested in lining their own pockets. Rumour says that they paid illiterate Gypsys 30 lev per vote …. yet again

  6. Hi Shaun good interesting piece about a country and an issue that is being ignored while the MSM indulge in Trump mania and the childish and tedious story of Nigel and Theresa.
    Global debt $152T can never be paid back you are right central banks will try more QE but the cracks in the dam will only get bigger.
    When the dam breaks we will be facing economic meltdown,once the penny drops that the Emporer has no clothes the bond market will collapse.

  7. Good to see UK ten year at pre brexit levels. Wolfgang Munchau tweeted yesterday that we are heading for the next euro crisis. Can’t think why he would be wrong.

    • Given it’s current strength and the ECB’s determination to try to depreciate it albeit unsuccessfully as it continues to be used a safe haven why ever should there be a Euro crisis?

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