More market alarm bells on Portugal

Another nasty day for Portugal in the financial markets.

The implied interest rate Portugal's five-year government bonds rose by more than one percentage point this morning, to well over 21%.

That is five percentage points higher than it was a few weeks ago, before the ratings agency Standard and Poor's cut them to "junk" status, as part of that mass downgrade of eurozone countries on 13 January.

The value of Portugal's short-term debt fell much more sharply than the longer-term stuff - a classic sign that investors are expecting a "credit event" in the not-very-distant-future.

At the same time, the cost of insuring against a Portuguese sovereign default has hit another record high.

If you take sovereign credit default swaps seriously (and some don't), traders now think there is a more than 70% chance of Portugal defaulting during the next five years.

European leaders meeting in Brussels have a little time to play with on Portugal. It is not (yet) formally off track in its joint European Union-International Monetary Fund adjustment programme, and there's no big "forcing" event coming up to concentrate their minds.

But today's market ructions are a reminder that some day fairly soon they will have to decide whether and how to give Portugal additional support, and come to terms with the reality that the government is unlikely to be able to go back to borrowing on the global financial markets in 2013, as its current rescue plan assumes.

You don't have to have a very long memory to find this all painfully reminiscient of Greece.

Remember, it was also supposed to be back on the market two years after its 2010 rescue package - ie. in 2012. The second bailout, announced last summer, was a belated recognition that this was never going to happen, and the economy was in much worse shape than previously hoped.

That "new deal" for Greece has taken more than six months to pull together and, famously, has involved private sector bondholders taking a big hit.

The Portuguese won't be the only ones hoping that their case plays out differently.