Debt Crisis Spreads Through Europe

(The Globe and Mail – Eric Reguly)

Investors are treating Portugal as the next Greece as the sovereign debt crisis spreads through the Mediterranean. Portuguese bonds slumped again Tuesday as bond holders took the view that the country’s credit quality is deteriorating, even though its deficit and debt ratios are not as dire as Greece’s. “Investors are looking for the next weak link in the euro zone,” Simon Ballard, credit analyst in London with RBC Dominion Securities, said in a phone interview. “That may be Portugal, though it’s a bad day for everyone in Club Med.”

Credit default swaps on Portuguese debt soared to as high as 380 basis points, up about 40 points from Monday, in early afternoon trading in Europe. That means it costs $380,000 (U.S.) to insure every $10-million of Portugal’s debt against default. Credit default swaps in other Mediterranean countries also rose. Italy, which has one of the world’s highest debt-to-GDP ratios, saw its credit default swaps widen by about 10 basis points, to 160 points.

“The contagion is definitely spreading and spreading quite rapidly to Portugal, Spain, Ireland and Italy,” Mehernosh Engineer, a credit strategist at BNP Paribas, said in a report published Tuesday. “The market has been in a show-me-the-money mode for well over three months and the lack of guidance is slowly and steadily sowing the seeds of a double-dip.” Most European stock indexes were down by 1 per cent or more on fears the debt crisis is spreading. The euro lost 0.68 per cent against the U.S. dollar. Read more here.