Every six months, Portuguese bond investors become obsessed with a small Canadian credit ratings agency. Although DBRS is less well known than S&P, Moody’s, and Fitch, it wields disproportionate power over Lisbon.
DBRS is the only agency that gives Portugal an investment-grade government bond rating; the others regard it as junk debt. This one rating is enough to keep Portuguese bonds eligible for the European Central Bank’s bond-buying program. Since March 2015, the ECB has bought more than €21 billion ($23 billion) of Portuguese debt as part of its efforts to boost the euro-zone economy. This extra demand for bonds has kept yields down, which in turn has lowered the government’s borrowing costs.
Bonds are eligible for purchase by the Frankfurt-based ECB if one of the four main agencies—among which DBRS is the smallest, by far—gives it an investment-grade rating. Thus, without DBRS’s lone investment-grade rating, Portugal falls outside the bond-buying program, like Greece. Needless to say, nobody wants to be like Greece when it comes to government debt.
Although the Greek debt crisis has subsided somewhat since last summer, the government is still imposing harsh austerity measures and selling off state assets in return for bailout funds. (Debt relief still seems like a distant dream.) Outside of the ECB’s program, the yield on 10-year Greek government bonds is a lofty 8.6%.
After European markets closed on Friday, DBRS reaffirmed Portugal’s investment grade rating and said the outlook was stable. Investors’ sighs of relief were palpable—the yield on 10-year bonds fell sharply in early trading today (bond prices move inversely to yields). This is good news for the government, which plans to sell as much as €1 billion in bonds later this week.
That said, Portugal is only off the hook until April, when its rating is up for review by DBRS again. Even with the ECB support, Portuguese yields are significantly higher than most other euro-zone bonds because of its weaker financial position, with government debt worth 130% of GDP and a moribund banking sector with a mountain of bad loans.
Portugal’s government, in office for just under a year, has reversed some of the austerity measures imposed when the country was forced into an international bailout. DBRS has warned that its rating could be lowered if the government’s commitment to meeting fiscal targets falters. Today’s rally fizzled out somewhat as the day went on, suggesting that investors in Portugal remain anxious about whether credit analysts in Canada will do something that puts off central bankers in Germany. Stay tuned.