Portuguese deficit, Irish stress tests weigh on CDS spreads

Spreads are jolted following Portuguese deficit revision, and expectations of a new round of bank recapitalisation in Ireland

An upwards revision in Portugal's deficit and the publication of Ireland's banking sector stress tests on Thursday saw a jump in the cost of credit default swap (CDS) protection on the two sovereigns.

Figures supplied by Markit, a financial information service, showed CDS spreads on Portugal climbed 22 basis points to 588.25bp by 15:37 in London. Lisbon on Thursday announced its revised 2010 budget deficit figure, which at 8.6% of gross domestic product, outstrips the 7.3% target and an earlier figure.

The Portuguese government had originally put the 2010 deficit at 6.8%. It was forced to revise the figure after Eurostat, the European Union's statistical watchdog, said Portugal had to include in its calculations a cash injection to the nationalised Banco Português de Negócios and loans to loss-making transport companies that had previously been classed as assets. The enlarged deficit figure piles further pressure on the sovereign to seek a bail-out.

Elsewhere in the eurozone periphery, CDS spreads on Ireland increased 26.25bp to 650.25bp as investors nervously awaited results of bank stress tests, conducted by the Central Bank of Ireland, that were expected to show a persisting capital shortfall among the country's lenders. The central bank announced on Thursday afternoon that Bank of Ireland, Allied Irish Banks, Irish Life & Permanent and EBS building society require a further €24 billion in capital if they are to meet a 10.5% Tier 1 capital ratio under the conditions of the test.

CDS spreads in Spain, Greece and Italy also widened, increasing 12bp to 237.5bp, 12.67bp to 997.67bp and 7.17bp to 152.17bp, respectively.