DBRS does not fear interests over 4%

  • ECO News
  • 16 November 2016

"In Portugal, our main concern is the slow pace of economic growth", states Fergus McCormick, chief economist of DBRS in Portugal, to ECO.

The recent increase in Portuguese interests does not worry DBRS – but only for now. After having considered the 4% rate “uncomfortable”, the Canadian rating agency highlights their main concern is Portugal’s “weak economic growth”. Even so, if the current tendency of risk increase lingers, their alert level will become greater.

The Portuguese interests have been continuously climbing since the previous week. The implicit rate in ten-year bonds, the reference in the market, has already reached the 3.6% mark, close to the limit beyond which DBRS told Portuguese online newspaper Observador they would feel “uncomfortable” with.

“If the increase in bond spreads is persistent, we would become more concerned”, stated Fergus McCormick, chief economist of DBRS in Portugal, to ECO. The risk premium of the Portuguese debt compared to Germany’s bunds has deteriorated, but not very much, since the rise in debt interests is generalized. Still, it is at 317 basis points, its maximum since the previous month. “In Portugal, our main concern is the slow pace of economic growth. We take a long term view and our ratings reflect our opinion about fundamentals over the long term”, he added.

"If the increase in bond spreads is persistent, we would become more concerned. In Portugal, our main concern is the slow pace of economic growth.”

Fergus McCormick, chief economist of DBRS in Portugal

The DBRS has kept Portugal’s rating at BBB (low) in October, as well as a stable outlook for the country’s credit risk – a very important decision, since it allowed national bonds to continue being eligible for the ECB’s purchase programme.

McCormick brings forward that, due to the recent volatility of the bond market, the DBRS is not “currently contemplating taking Portugal to a rating committee”, which decides to anticipate or not any unforeseen action. But he did not refrain from alerting to the consequences of the instability recently seen on debt markets that is affecting not only Portugal, but the rest of the world markets.

“There is currently uncertainty over US policies and this is translating into greater market volatility. We expect that this uncertainty could last a long time”, the head of the Canadian rating agency in Portugal stresses, contextualizing the increase in yields on the periphery of the Euro Area in comparison to Germany with the fact the inflation expectations for those countries are lower than US’s.

All things considered, McCormick states: “ If this trend persists, investors would become more concerned about the sustainability of public debt”, which is also a concern previously shared by several experts.