Friday, February 5, 2010

Portugal, Greece and Contagion

Last week it was Greece.

This week it’s Portugal.

Portuguese bonds and shares came under fire for the second day running as concerns over sovereign debt spread from Greece to other high-deficit countries in the eurozone.

The Lisbon stock market fell almost 5 per cent on Thursday, the biggest daily fall since November 2008, and bond yields rose to new highs amid doubts over the ability of Portugal to consolidate its public accounts.

The cost of insuring Portuguese debt against default also rose to a record high.

In international finance this phenomenon is called contagion: one country gets into trouble, spooks its debtholders, and they start bailing out of other countries they view as poor credit risks.

Also, bear in mind that when I mentioned the PIGS, I wasn’t picking on those countries. PIGS is a cute and easy to remember acronym, but no one would use it at all if Portugal, Italy, Greece, and Spain weren’t all in the same sort of financial positions.

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