Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Eurozone: External Exposure
• Portugal, like Greece, has a relatively high
share of its public sector debt held abroad.
• In contrast, foreign investors hold a lower
proportion of Spanish and Italian debt.
Chart 1: General Government Debt Held Abroad
(% GDP)
100
90
80
70
60
Contagion not equal
The contagion across sovereign debt markets in the
eurozone has been spreading but yield spreads
between Portuguese and German government bonds
have widened substantially further than their Italian
and Spanish counterparts. The underperformance in
Portugal reflects various factors, some fundamentally
driven, some more market-driven.
50
40
30
20
10
0
Greece
Belgium
Source: IMF
Portugal
Austria
Italy
France
Ireland
Netherlands
Germany
Finland
Spain
The fundamental differences between the vulnerable
economies in the eurozone are discussed in detail in
the accompanying article Eurozone Periphery:
Compare and Contrast. In short, the key problems in
Portugal include the following: the low growth rate of
the economy, which makes it difficult to stabilise the
public finances; and the low level of national saving,
linked to the lack of competitiveness of the economy,
which leaves the Portuguese economy heavily reliant
on capital inflows.
While the public sector debt-to-GDP ratio in Portugal
is much lower than in Greece – at around 75% and
115%, respectively, in 2009 – it was the structural
nature of the problems listed above which led us to
conclude earlier in the year that, were problems in
the eurozone bond markets to spread beyond
Greece, then Portugal would be right in the firing line.
Our concerns have been borne out.
Foreign affairs
There are also market-specific factors to consider.
One is less liquidity in the Portuguese bond market
than in other, larger bond markets in the eurozone.
Another significant difference is the high proportion of
public debt in Portugal held by overseas investors.
Chart 1 shows IMF data on general government debt
held by foreign investors as a percentage of GDP for
the largest eleven eurozone member states. Chart 2
then converts this data into the proportion of general
government debt held by foreign investors, using
debt to GDP and nominal GDP data from Eurostat.
Foreign ownership of government debt is much lower
in Spain and Italy than in Portugal which matters in a
period of increasing risk aversion.
Chart 2: General Government Debt Held Abroad
(% Total)
90
80
70
60
50
40
30
20
10
0
Austria
Greece
Finland
Portugal
Netherlands
Source: IMF, Eurostat, BNP Paribas
Ireland
Belgium
One positive factor for Portugal relative to Greece is
its lower rollover risk, with redemptions in relation to
GDP in 2010 about half those of Greece. The same
is true for Spain.
Spain has other problems, including the after-effects
of the property crash and high levels of private sector
debt. For now, markets have given Spain the benefit
of the doubt, with the 10-year yield spread between
Portugal and Spain rising above 200bp, the highest
since the mid-1990s. This may not continue if stress
in its financial sector increases.
Austria is high in the rankings on debt held abroad
but its fiscal situation is comparatively robust. That
said, Austria has not been immune to market
turbulence of its own, with the 10-year yield spread to
Germany, currently about 40bp, having risen to more
than 125bp in mid-2009 at the height of concern over
its banking sector exposure to the CEE economies.
France
Germany
Spain
Italy
Ken Wattret 7 May 2010
Market Mover
10
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