Portuguese banks cut to junk

LONDON: Credit protection costs on Portuguese banks and state-backed corporates jumped for the second consecutive day on Thursday as the fallout from the sovereign's downgrade to junk showed little sign of abating.

Portuguese bank credit default swaps remain under pressure and widened in line with the sovereign. Portugal's five-year CDS is 65bp wider at 985bp, according to Markit data.

Five-year CDS on Banco Espirito Santo is 55bp wider at 925bp, while Banco Comercial Portugues is 60bps wider at 1185bp.

Cash markets, which are traditionally slower to react, also weakened slightly. The BESPL 3.875% January 2015 is 4bp wider to asset swaps at MS+850bp and the BCPPL 5.625% April 2014 is 20bp wider at MS+1280.

That comes after Moody's followed its shock four-notch downgrade on Portugal late on Tuesday with an expected downgrade of four Portuguese banks including BES, BCP, Caixa Geral de Depositos and Banco International do Funchal (Banif).

CGD and BES have been downgraded by three notches to speculative-grade Ba1 from Baa1 and remain on review for further downgrade. BCP and Banif have been downgraded by four notches to Ba2 from Baa1 with a negative outlook. The agency cited the alignment of banks to the sovereign as the reason for the downgrade.

A sharp widening in triple-B rated utility Energias de Portugal (EDP) and Portugal Telecom CDS, to levels associated with speculative grade, indicates that both credits will move into the iTraxx Crossover index from their current investment-grade Main status at the S16 roll in September.

The cost of protection on EDP has risen a further 55bp this morning to 525bp, setting another record wide. ELEPOR's cash curve is also widening across the board by an average of around 20bps to asset swaps.

Portugal Telecom five-year CDS was slightly less volatile, widening by 10bp to 575bp, with the liquid cash curve around 10bps wider to swaps.

Copyright Reuters, 2011