And Now, Portugal

By Sam Mattera
Benzinga Guest Writer

On Monday, the yield on the 5-year Portuguese note spiked. The yield hit a record for the post-euro era of 22.69%.

The trade may have been fueled by the turn of events in Greece, as the general perception of the market may be to accept Greece’s default as a given.

Last year, markets appeared frightened by the prospect of a Greek default, but various commentators have begun to talk down the event. Perhaps most interesting was JP Morgan Chase’s CEO Jamie Dimon characterizing the net effect of a Greek default on US financials as being practically nothing.

Greece’s overall debt is a relatively paltry sum when seen from a global perspective. Still, the turn of events in Portugal may have given credence to what market bears have been warning of: a contagion effect.

There had been plans for a deal to allow Greece to take a “voluntary” haircut of 50%.

Yet, some creditors resisted the deal (perhaps hoping to use credit default swaps to profit—these instruments wouldn’t payout in the event of the default being voluntary) and there was talk that Greece would need to increase the haircut further to better get the growth rate of its debt under control.

The EUR/USD currency pair traded lower early on Monday, as did US equity markets, with the Dow Jones opening down nearly 100 points.

Bloomberg reported that some traders had seen the European Central Bank stepping in to purchase Portuguese paper. This would follow previous trends, where the ECB was said to have purchased Italian and Spanish debt when the yields on these instruments rose rapidly.

The ECB has denied in the past that it will undertake the role of actively “monetizing” the debt of troubled Eurozone nations.

With further European meetings set to take place in coming weeks, the EUR/USD could continue to be an active currency pair.

If a Greek bankruptcy does come to pass, it could send the euro trading far lower against the US dollar. As Portugal’s yields rally, market participants may begin to believe in the danger of a contagion effect.

Of course, the ECB could alleviate the market if it undertakes aggressive actions of its own. Additional bond purchases or another LTRO may have a powerful, confidence-boosting effect.

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