Fears about the future of the eurozone have re-emerged as Britain’s referendum on European Union membership threatens to halt growth and set free other EU countries where the population wants an in/out vote of their own.
The UK’s latest referendum polls shows a majority of voters wanting to leave the EU. This has caused flighty investors to shun bonds in non-core countries and head for safer debt issues.
In a critical report from Reuters today, German bonds are singled out as the preferred destination with yields hitting record lows and ten year bonds selling at below zero, as are long dated bonds in Japan and Switzerland.
If the UK leaves the EU, Portugal and other hugely indebted southern countries will take the brunt economically and politically with a fragile government in Lisbon and a general election coming up in Spain.
Portugal already is under scrutiny due to its inability to convince the international financial community that its spending is under control and that its growth projections are achievable.
The cost of issuing government bonds has rocketed in Spain, Italy and Portugal and credit default swaps, the key marker for credit risk, are at four month high for Portuguese bonds.
Commerzbank’s opinion is that Portugal is on the brink of a crisis with a hesitant economy hampering its ability to pay off high levels of public debt.
Now at risk is the last decent credit rating that Portugal has been lucky to hold onto, without which the country will be excluded from the European Central bank’s bond buying scheme which is keeping a cap on the country’s borrowing costs.
Lisbon and Prime Minister David Cameron are praying for British voters to vote to remain in the European community but with the polls showing a significant lead by the ‘out’ voters, and only a week to go before polling day, the outcome is by no means certain.
