Implications Of The Rise In Portuguese Credit Risk

In this article, we will outline some implications of the credit risk increase in the Portuguese Republic, and our opinion should not be considered as a recommendation.

In fact, we speak in another article of the increasing attractiveness of the Portuguese government debt, whose investment we considered quite attractive at height levels, through the Portuguese Treasury Certificates.

When we referred to this investment, we denote the high level of risk attributed to the bankruptcy of the Portuguese State, which would result in its inability to pay the debt and its cost.

In this context, we have to highlight two very important issues:

  1. We do not know whether an intervention by the IMF and an eventual write-off of debt ( which would represent a cut, at the head, of the value of the state debt, telling its creditors that instead of duty 100 would only be owed 90, for example ) would have impacts at the level of Deposit Certificates;
  2. The level of country risk, as evidenced by the unrelenting increase in the level of CDSs in Portugal, has been a constant. That is, the government may have to pay close to 7.5% interest rate if it wants to finance in the international markets, for a term of 10 years.


What are the Implications of this Ascent?

If one recalls our article on how to evaluate the attractiveness of an investment, we point out that the level of return demanded by investors for a given asset is dependent on the return of a risk-free asset, as well as a risk premium to risk incurred.

Thus, the rise in the level of country risk has a direct impact on these two strands. If, on the other hand, the return of the risk-free asset went from less than 3% to close to 7.5%, the risk premium would have increased in a similar way.

Let’s say that international investors, to invest in Portuguese assets, now require a risk premium between 4% -8%. That is, we easily arrive at required returns of 15-20%, prohibitive, unrealistic value and compared to returns required for developing or emerging economies.


What does this mean?

In short, it means that financial markets are being too severe with the Portuguese economy. We do not mean that the economic outlook is favorable ( on the contrary ) or that the years ahead will be attractive for risky assets in Portugal.

However, we mean that investors are too pessimistic, which results in the creation of good investment opportunities, available to investors who are able to take risk and forget money for a few years.



Great investment opportunities can be found in companies with good dividend levels that are sustainable for years to come.

For example, companies such as PT Telecom, which has reinforced its dividend distribution for the next two years, or EDP, which despite having high levels of debt is at attractive levels, with solid dividends and a very high operational risk profile. low.

Jerónimo Martins, whose results are generated in more than 50% in Poland, or Altri which has a large part of its sales from abroad, are some examples.

Despite these references, we always recommend a clear analysis to the company, trying to understand what will already be in prices, the sustainability of dividends, growth and results.

Anyway, great analysis is needed. However, we are certain that there are several good investment opportunities for the medium term.

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