Portugal’s debt interest rates are lower than those of Spain

  • ECO News
  • 4 November 2019

One week before the Spanish elections, and with no prospect of an end to the political instability in the country, interest rates on Spanish debt widen their gap with those of Portugal.

Spain goes to the polls for the fourth time in four years, with no prospect of the socialist favourites getting an absolute majority. The political instability in the country is leading to an increase in the interest on Spanish public debt and to the difference with Portugal being at its highest level since 2006.

Next Sunday, 10 November, legislative elections will take place in Spain, at a time of new tensions in Catalonia, where demonstrations and episodes of violence took place after the main leaders of Catalan independence were sentenced to prison sentences.

The main newspapers in Spain – ABC, El Mundo and La Razon – have published polls this Monday and all of them show that the parliamentary elections will bring an end to the political impasse. The ruling party, Pedro Sanchez’s PSOE, is expected to lose about 120 of the 350 seats in the Spanish parliament, while the far-right VOX party is expected to gain prominence. However, neither the extreme right nor the extreme left, led by the People’s Party, should achieve an absolute majority.

Faced with uncertainty in the country, the Ten-year bond yields in Spain reached a maximum of 0.306% on Monday. The same debt securities in Portugal did not trade above 0.236%. The difference of 7 basis points is the highest since 2006, with Portugal shining. In recent years, the scenario has been the opposite, with Portugal paying over 16% in 2011 when Spain had rates of 5%.

On September 2, the difference between the interest rates on Portugal’s and Spain’s debts disappeared for the first time since the crisis. Investors are now asking for the same rate for both countries’ bonds, which signals that both countries’ debts have the same risk. The favourable international context, together with the positive sentiment towards Portuguese public accounts and the Spanish political instability, caused the rapprochement which led Portugal to overtake Spain.

Both are, however, very close to the 0% barrier due to the policy of the European Central Bank (ECB). The institution relaunched net purchases of debt, with a new phase of the acquisition programme on November 1. It will buy 20 billion euros per month, positioning itself as a major investor and holding most of the securities that arrive on the market.