There were several stand-outs in yesterday’s markets and Portugal was one of them, with yields rising dramatically as other peripheral eurozone markets saw theirs fall in the wake of the ECB 3Y LTRO. This was despite the Troika’s relatively up-beat assessment of Portugal’s progress on its program of reforms and austerity, in contrast to the frustration often voiced with regards to Greece. But as with most, Portugal is being asked to implement austerity and reforms against an economy which will contract this year, by more than 3% according to the latest forecasts from the troika.

The current level of yields (nearly 14% 10Y) reflects a growing concern that Portugal will not be able to return to market funding when the current aid package runs out in a year’s time. That Portugal sold-off on the day the ECB auction took place is concerning, because it could well be that the ECB favours this as a means of support rather than its bond-buying program. The last two weeks of data have shown no bond purchases from the ECB and, whilst there was talk of the ECB checking prices on Portugal yesterday, there did not appear to be strong confirmation of buying. The issue is that, with the ECB having secured its place as a senior creditor to private sector bond-holders, the more it ramps up its purchases the greater private sector investors will fear taking the hit on any eventual restructuring. Germany has been at pains to point out that the private sector involvement in Greece will be a one-off event, but markets appear unable to take this assurance at face value, not least because this crisis has been littered with about-turns and indecision. At current yields, Portugal stands no chance of returning to the markets when the current aid package runs out and achieving the required level of austerity and reform as the economy contracts by 3% or more is historically unprecedented within the recent history of OECD countries. This is why Portugal will remain vulnerable over coming months.