MacroScope

Portugal is likely to bear the brunt of any outcome to the Greek debt swap negotiations — whether the country convinces investors to take a hit on their debt holdings to help it stay afloat or resorts to legal options to force it to do so.

The 10-year yield spread over Bunds has widened nearly 200 basis points this week after the Greek debt talks failed last Friday, and were briefly suspended, and as a downgrade by Standard & Poor’s to “junk” forced some index-tracking investors to sell. As Greece and creditors work against the clock to try to reach a deal, Portuguese 10-year yields hovered near euro-era highs.

The thinking is, if Greece gets private bondholders to write-down losses on their Greek bond investments, thereby reducing its debt load, what’s to stop struggling Portugal from seeking to do the same?

Richard McGuire, senior fixed income strategist at Rabobank says:

Portugal certainly (is) the weakest link here. Already the market is speculating on haircuts for Portugal, so there already is Greek restructuring contagion in evidence in Portugal. And I think that will continue.

If Greece cannot persuade enough bondholders to sign up to the offered terms on a voluntary basis, it could introduce legislation to force those resisting a deal to swap their bonds through collective action clauses (CACs).

In this case scenario the yield spread between benchmark 10-year Portuguese and German bonds could widen between 100 and 200 basis points, says Achilleas Georgolopoulos, strategist, at Lloyds Bank.

The idea that other countries could follow Greece’s example and get private investors to write-down their peripheral debt holdings has been a source of contagion.  In an attempt to calm markets, euro zone leaders have said Greece’s case was unique and exceptional.

But for others, the question is — why shouldn’t bondholders pay for their investments gone array?

Alessandro Giansanti, senior rate strategist at ING says:

What is most important now is helping Greece to reduce its debt to have a quite a consistent cut in the debt-to-GDP more than protecting the interest of investors.