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By Emelia Sithole-Matarise and Anirban Nag
January 27, 2012 9:49 AM EST
Investors are betting that after cap-in-hand Greece comes Portugal, selling off its stocks and bonds in the belief that the euro zone laggard cannot avoid a default without a second bailout.
While borrowing costs have fallen for debt-ridden Spain and Italy as well as bailed-out Ireland on the back of a huge infusion of low-cost loans from the European Central Bank, Portugal's have shot up, setting it on a path towards bankruptcy.
The rot really set in two weeks ago after Standard & Poor's downgraded 15 euro zone countries, putting Portugal in the "junk" category, along with Greece. That shuts it out from tapping capital markets in the foreseeable future and makes its task of meeting future debt repayments even tougher.
Since then, the rise in both government bond yields and the cost of insuring debt against default has been relentless.
This is the opposite of what has happened in Ireland, which was bailed out in November 2010 just six months before Portugal received a 78 billion euro bailout from international lenders.
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"If we look at where bond yields are for Portugal it makes it impossible for Portugal to access debt markets in 2013," said Nikolaos Panigirtzoglou, a rate strategist at JPMorgan.
"It's a country that still relies on the official sector in terms of financing its current account deficit and repayments and this makes it certain that we're going to get a second bailout for Portugal later this year."
Portuguese debt and stocks have fared far worse than other highly-indebted euro zone given worries it could follow Greece and need to restructure its debt.
The absolute level of 10-year yields, which reflects how much payment investors are demanding to hold the country's debt, has risen three percentage points to 15 percent since S&P moved on January 13. This is almost double the equivalent Irish yields, which have fallen to their lowest in over a year over the same period.
Unlike Portugal and Greece, Ireland has moved to surplus on its current account over the past year in its fight to rebuild investor confidence.
"Ireland ... is a different case in the sense that its private sector at least is doing OK and is growing and generating trade surpluses," said Richard Batty, investment director at Standard Life Investments.
Ireland still faces hurdles, particularly given a weakened growth outlook on top of a debt ratio officially forecast to peak at 119 percent of economic output next year. But it is campaigning on a number of fronts to improve its chances of funding itself fully for 2014.
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Portugal, Ireland, Italy government bond spread
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