Days when rosy predictions were made about Portugal’s recovery and independence from bailout aid seem to be over, at least for now. This Eurozone member requested rescue aid in 2011, and was showing a relatively smooth sailing recovery until a month ago and then all hell broke lose. Two key ministers in Portugal’s Pedro Coelho-led government resigned in a span of few days. Both the Portuguese foreign minister and finance minister stepped down, citing almost similar reasons for their resignations.  Paulo Portas, the foreign minister, disagreed with the budgetary policy while finance chief Vitor Gaspar was unsatisfied with Portugal’s progress in accordance with the bailout program.

Portugal successfully raised $3.92 billion in March 2013 in 10-yr bond sales when the yield was 5.67 percent. Today yields of 10-yr Portuguese bonds went above 8 percent, their largest slump since November of last year. The other benchmark, the 4.95 percent bond due in 2023, dropped 7.42, or  EUR 74.20  per EUR 1,000 face amount, to 79.68, according to data from Bloomberg. The 10 year PGB yield was the second highest among EU countries, second only to GGB 10 yr yield of 10.5 percent, at the end of June.


Hedge Fund Longs In Portuguese Debt

Investors clamored to buy PGBs when the country initiated a debt sale in March, receiving $13.3 billion in offers. A number of hedge funds have long positions in Portuguese debt which they have maintained since last year. PGBs have been an investment of choice among funds, and hedgers have bet in favor of Italian, Greek and Spanish bonds as well.  A notable hedge fund that has been on the long side of Portuguese government debt is Dan Loeb’s Third Point. He first made the long case for Portugal in the first quarter of 2012, at a time when rating agencies categorized Portugal’s debt as junk. There is no certainty whether Loeb still maintains the position, but we can be sure that he had not exited it as of the third quarter of 2012 when he discussed it again in the quarterly letter. Portuguese debt was Loeb’s top performer in April 2012.

Crispin Odey has been a long term investor in Portugal, and his fund Odey Odyssey has a position in long dated PGBs which is Odyssey’s second largest position. Odyssey’s Tim Bond believes that Portugal would be candidate for OMT but after German elections, the fund was losing in the PGB position until May of this year. Odyssey was down 0.1 percent in May and is up 12.5 percent YTD.

Tiger cub Argonaut Capital was making profits from long Portuguese debt positions until February of this year, and the fund is up 7.2 percent as of May. TT International, a $1.5 billion global macro fund, has held a long in Portuguese debt since last year. However the fund reduced its position in April as recovery prospects for the country looked bleaker. TT is up 6 percent for the year as of May.

High Debt-to-GDP Ratio

Analysts at RBS  believe that the risk of new elections and an extension of IMF’s bailout is very much on the table for Portugal. The economy has no near term stimulus that will steer it in the right direction, German elections are key to the future of Portugal. In case of mid-term elections in Portugal, it is unlikely that any party will win a clear majority which would again make it difficult for the country to follow through with the austerity measures if the legislative support is weak.

RBS also stated that Portugal’s debt-to-GDP could rise to 134 percent in 2015 if deficit continues to climb at the present rate, its worst case projection. RBS recommends shorting PGBs through the summer as markets remain volatile, the analysts are bullish on Portuguese banks and corporate debt and recommend longs in Banco Espirito Santo and Caixa Geral de Depositos 2015 bonds.

Morgan Stanley’s reserach on European equities has shown that Portugal remains cheap and marginally over-owned. Portugal’s net debt to EBITDA and net debt to equity ratio estimates are the highest among all Eurozone countries. Portugal’s price return relative to MSCI World Index has been down 12.4 percent year to date.