With political disagreement between different parties over the country's bailout from the IMF, ECB and the European Commission, investors in Portugal have been taking risk off the table over the last few weeks. As illustrated in the chart of Portugal sovereign spreads relative to Germany, 10-year spreads have widened from a level of 378 basis points (bps) in late May to 556 bps today. That being said, spreads are down today from a YTD high of 380 bps on Friday.
The three main ruling parties have set a deadline for 7/21 to come to an agreement over how to proceed with the terms of the bailout, so it is likely to be a volatile week in that country until there is more clarity on the issue. While, Portugal may not be the biggest country in the world, whatever the outcome of the current disagreement, it has the potential to have credit market ramifications around the world.