Although interest rates on government debt have risen, the soundness of public finances, economic growth and the reduction in the debt-to-GDP ratio mean that Portugal remains a country in which investors can maintain their confidence, as Florian Späete, Senior Bond Strategist at Generali Investments, explains.

Instability in European sovereign debt markets, driven mainly by budgetary concerns relating to France, is thought to have put pressure on Portuguese bonds. In other words, the spread between interest rates on 10-year Portuguese bonds and German Bunds – which are considered a safe-haven benchmark in the market – widened by 40 basis points to over 50 basis points.

However, the impact was more limited in Portugal than in other peripheral economies, such as Italy. The Generali Investments expert notes that this difference shows that investors remain favourable towards the state of the Portuguese economy.

Investor confidence

At present, Portugal is benefiting from above-average economic growth, a reduced budget deficit and a budgetary track record that has shown a surplus in recent years. Added to these factors are expectations that the public debt-to-GDP ratio will continue to fall in the coming years.

These developments have helped to strengthen Portugal’s financial credibility and improve its credit risk rating. The analyst adds that the combination of economic growth, budget surpluses and debt reduction has attracted foreign investors, which has improved market liquidity and helped to sustain demand for Portuguese debt, even whilst it was going through a period of greater instability.

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