After the run-up in the Portuguese sovereign bond market, which several big name hedge funds cashed into, it’s now time for Portuguese bank debt to become a hot commodity. Banks in Portugal could end a four-year ban on selling junior debt in the markets, and it seems hedge funds are already lobbying to speed up the process, reports Reuters.

ECB cuts rates to near zero

The European Central Bank unexpectedly cut interest rates to their lowest rate yesterday, in fear that very low inflation could threaten the economic recovery in the eurozone. ECB cut the bank lending rate from 0.5% to 0.25% whereas the emergency borrowing rate was cut 25 bps to 0.75%.

While the region is officially out of recession, there are still some bumps in the road. True recovery in Europe can be realized only when the peripheral European countries like Spain, Italy and Portugal start showing stable growth. The ECB seems keen to get as aggressive as needed, and in response to the fresh rate cut, the euro slipped.

One way in which foreign investment can be boosted in Portugal is if the banks in the country start selling junior debt, Spanish and Italian banks have already done so. Health of major lenders in Portugal, Caixa Geral, Millennium BCP and Banco Espirito Santo and confidence in their growth can be boosted if they start selling subordinated debt.  In Italy UniCredit and in Spain CaixaBank have already ended the ban and are now raising junior debt.

Portuguese sovereign bonds

Reuters reports that several London-based hedge funds are interested in the potential offering, and it is likely that a Tier 2 bond will be issued before the end of this year. Some debt bankers have also said that it is easier to project the price of the debt in Portugal now since Spain and Italy can serve as a reference.

Others think that banks will wait until the state issues the next round of government bonds after it issued $3.92 billion in March 2013, when yields were at 5.67%. Portuguese debt yields crumbled in the summer, yields on 10-year Potuguese Government Bonds shot past 8% in July, but are now back to where they started at 5.7%, still second-highest in the region after Greece. Some credit experts think that Portuguese banks will wait until after another round of PGB issue to check the market’s appetite. Hedge funds who have positions in Portuguese government debt include Odey Asset Management, Pharo Macro, Dan Loeb’s Third Point and Argonaut Capital – all have positions in PGBs. Jon Bauer’s Contrarian Capital also had a position in the debt which it closed successfully in July.

Some think Portuguese lenders are in a better financial state than their peers in Spain and Italy, and can therefore price their Tier 2 or possibly Tier 1 offering more to their advantage.

Meanwhile, complications in the Portuguese budget keep on piling up. Recently, the EU commission raised its concerns about the objections the Constitutional Court raised about some key points in the budget. The Court would not favor spending cuts through layoffs and reduction in wages, which is an integral part of Portugal’s bailout package, comments Citi Research. If the ruling comes against these tightening efforts the country’s return to market could be slowed down and could bring up the need of a second bailout package.