Interest rates continue to skyrocket due to the July and September announcements of the European Central Bank’s (ECB) policy rate hike last week (yield) Portugal’s public debt in the secondary market. This Tuesday, within a reference period of 10 years, yield It has been closed for up to 5 years, exceeding 3% for 2 consecutive days.
Interest rates on the secondary market (where securities are traded among investors) have risen 0.5 percentage points since the eve of the last ECB meeting on June 9. And in relation to the rates paid in April when the bond line due in 2032 was launched, they have already increased by more than 1 percentage point: 1.694% for syndicate operations to now 3%. that’s all.
However, Italy, the third-largest economy in the euro and the second-highest debt economy, is drawing attention (after Greece, which has already accumulated three bailouts since 2010). Since Monday, interest rates have exceeded the maximum of 4% since the end of 2013, expand Analysts rang a warning as it rose to 250 basis points (equivalent to a 2.5 percent difference) in connection with Germany’s debt, which is the benchmark for the euro area.
Medina can hit the red line
Risk awareness is even higher when we take into account the expected rise in interest rates on 10-year bonds over a 12-month period. By June 2023, interest on Portugal’s debt should reach 7.5% and Italy’s debt should approach 9.5%, according to the algorithms of the World Government Bond Financial Portal. Spreads related to German debt reach 250 basis points for Portuguese bonds and 450 basis points for Italian debt. This reflects what analysts call the “fragmentation” of the eurozone debt spectrum.
In the case of Portugal, when interest rates return to over 7% next summer, the famous “red line” drawn by then-Minister of Finance Teisheira dos Santos comes to mind. In October 2010, the Minister publicly acknowledged that a 7% interest rate would require Portugal to seek relief. The red line was scheduled to cross in some sessions at the end of 2010, but it wasn’t until February of the following year that it began to systematically close over 7%. The redemption claim will be filed on April 6th, when interest rates in the secondary market are already approaching 9%. A few days ago, on March 23, the government, led by Jose Sócrates, took control of the PEC in parliament and resigned due to a negative coalition of opposition parties as a whole.
If current debt interest rates continue to rise, Fernando Medina will face a 7% red line next summer.
However, the situation in 2011 was different from what it is today. The ECB, then led by Jean-Claude Trichet, raised the key rate to 1.5% in July 2011. This was seen as a mistake in the palm and button strategy, as peripheral debt further tightened monetary policy. crisis. At full throttle (there are already 3 rescues in the field). From November of that year, it was Mario Draghi who began to overturn Trichet’s policy. At that time, Portugal needed to significantly reduce its deficit, which reached 11.4% of GDP at the end of 2010, leaving no room for budget manipulation.
Currently, the ECB guarantees that it will do everything necessary to combat fragmentation, as well as a new cycle of key rate increases. Christine Lagarde, pushed by journalists at the latest press conference, spread Occurs as needed, using all the flexibility still available in managing the reinvestment of the huge securities portfolio acquired by the ECB (totaling around € 5 billion) in relation to German debt, however. Revealed to do with a new instrument “like the past”. However, I will not explain the details.
The ECB’s message to the market is, by chance, a second debt led by Draghi, the successor to the ECB’s top Trichet, not to mention a speculative attack on Italy, the euro’s third-largest economy. It does not allow the crisis. And Lagarde’s predecessor.
Budget margins are also different. Brussels has extended the suspension of the deficit and debt rules until the end of 2023, but requires a commitment to budget consolidation in the deficit forced by the fight against the pandemic in 2020. Portugal departed in 2022 This year’s deficit is less than 3% and is projected to be less than 2%.