Greek Wrangling Bodes Ill for Lisbon



Greece may breathe a sigh of relief when—or if—it finally completes its long-delayed debt restructuring next week.


But the plodding negotiations have been bad news for another country: Portugal, whose creditors fear they may be force-fed the same difficult debt restructuring terms that are on the table for the Greeks.

The Greece deal still isn’t done, and Friday there were more signs of delay. Greek Finance Minister Evangelos Venizelos said the two sides had “resolved a number of issues but critical issues remain open.” Euro-zone finance ministers postponed a planned Monday meeting till Wednesday, Mr. Venizelos said.


Portugal has long been perceived as the next-most-likely country to follow Greece’s path and restructure its debt, and the tough terms being presented to Greece’s creditors have led many in the market to fear the same could come for Portugal, analysts say.


Perhaps most worrisome to those who have lent to Portugal is the notion that Greece may pass a law that would force a reluctant minority of bondholders opposed to the restructuring to participate nonetheless.


German Chancellor Angela Merkel visited Beijing and came home with little but Chinese promises, while her economic minister dismissed suggestions that the ECB should help Greece by writing off its debts. Dow Jones’s Terry Roth explains.


The result has been a sustained flight from Portuguese debt. Yields on the Portuguese 10-year bond have risen since the beginning of the year even as yields on comparable Spanish and Italian bonds have tumbled amid a bountiful injection of liquidity into the banking system by the European Central Bank. The Portuguese yield curve remains inverted—investors are demanding higher rates of interest for short-term lending, a sign of concern about impending trouble. The Italian yield curve has straightened out.


Portuguese bonds were broadly stronger Friday, amid signs that the ECB had stepped in to calm markets. The 10-year note was yielding around 14% late Friday in London.


The threat of a change in Greek law has hovered for some time, but as the talks drag on, it has become more likely that Greece will have to resort to the tough tactic.


The Greek restructuring deal on the table involves persuading creditors to exchange their bonds for new securities with a face value that is half of what they are owed. To nudge those that won’t agree to the swap, Greece is planning to adopt retroactively “collective-action clauses” that bind the minority of creditors to the decisions of the majority.


Such CAC clauses are “accepted market practice”—when new bonds are issued, says Charles Blitzer, a former International Monetary Fund official who worked on several sovereign restructurings. “However, retroactively inserting CACs in sovereign bonds via legislation is unprecedented.” If it become seen as a precedent, Mr. Blitzer says, “prices of the debt of other peripheral euro-zone countries could be negatively affected.”


So far, Portugal has borne the brunt of it. Moody’s Analytics, a sister company to the ratings’ firm, estimates that there is a roughly 25% chance the country will default on its debt in the next five years. Its figures, which are derived from credit-default-swap prices, put Italy, Spain and Ireland at less than 10%.


That divergence is a rare silver lining for the euro zone; in months past, troubles in Greece and Portugal have echoed into Spain and Italy. At least for now, says Nicholas Spiro of Spiro Sovereign Strategy in London, “contagion stops at the Portuguese-Spanish border.”


Whether that holds will depend in part on how the Greek talks conclude. If there is high resistance from Greece’s creditors, and collective-action clauses are deployed to roll a lot of them over, markets could become skittish again. The euro-zone authorities taking part in the discussions have a difficult task: they’d like to pin large losses on creditors, in part to reduce the sums they’ll have to give Greece, but terms that are too generous to Greece risk making restructuring more attractive to Portugal or even Ireland.


In that case, says, Michael Hampden-Turner, credit strategist at Citigroup in London, “there is pressure for Portugal to get something.”