Some Thoughts On Possible China Purchases Of Portugal Bonds

by Win Thin

We think it’s worth commenting on Portuguese press report today that China has pledged to buy up to EUR4-5 bln ($5.2-6.5 bln) of Portugal sovereign debt. Purchases would be either in the primary or secondary markets and would be made during Q1 11. The story comes a day after China Vice Premier Wang made supportive comments for the euro, but China officials so far are denying today’s story. According to Bloomberg data, Portugal has a stock of government debt of around $180, and has about $10.7 bln in principal and interest payments coming due in Q1 11 and around $12.5 bln in Q2 11. So while China purchases could buy Portugal some time, it simply does not address the underlying solvency problem. Same thing with ECB purchases; they will help put a temporary lid on borrowing costs, but it cannot go on forever. And what if the rot continues to spread? Is China willing to buy Spain, Italy, and France bonds as well? We suspect the markets are also skeptical, since despite this news, Portugal bonds are underperforming today with 10-year yields up 12 bp.

The story does underscore the strength of EM during this DM crisis. Portugal has already approached Brazil to buy its bonds, and so it’s only natural that it also seeks funding from China and perhaps other EM credits. Our understanding was that Brazil was not very interested, and we are a bit surprised that China would offer to make such a risky investment in current market conditions. For now, color us skeptical on this story.

Developed Country Risk Index Q1 2011

5-yr CDS periphery

5-yr CDS core

10-Yr Spread To Bunds Periphery

10-Yr Spread To Bunds Core

  1. Traderscrucible says

    China is worried about the price of the EURUSD. They are just trying to keep the EUR above 1.3000 so Germany/France doesn’t drink their export milkshake. The announcements are public to maximize the impact, but the buying has been very weak because they do not want exposure.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More