Irish, Spanish and Portuguese bonds face inevitable "contagion" as concern that Greece will default undermines confidence in the rest of the European Union's most indebted nations, Citigroup said today.
Investors should hold an "underweight" position in the bonds of Ireland, Spain and Portugal, wrote interest-rate strategist Steven Mansell, meaning they should own a lower percentage of the debt than in the indexes they use to measure performance.
Greece may struggle to raise the €11.6 billion it needs by the end of May, he said
"We are currently in the eye of the storm in terms of the pressures facing peripheral markets," he wrote.
"There is now increasing uncertainty in our view surrounding Greece's ability to raise the required amount of funding without recourse to the emergency lending facility provided by euro member states and the International Monetary Fund. We think that some form of contagion is inevitable."
The spread between Irish and German bunds was 143 basis points today.
The yield premium investors demand to hold Greek over German bunds jumped to the most since the euro's debut today after finance minister George Papaconstantinou said there will be no need for additional measures to shore up the nation's finances. The Greek government said this week its budget deficit will be revised to at least 12.9 percent of gross domestic product, more than four times the European Union's 3 percent limit.
"While Greece is unique in facing acute near-term liquidity pressures, the fundamental issue facing peripheral markets is that they all share severe structural imbalances that require tough, remedial policy action," Mr Mansell wrote.
Bloomberg