EURO GOVT-Greece, Portugal under pressure; Ireland in focus

* Portugal, Greece pressured after S&P downgrade

* Ireland in focus ahead of key stress tests

* Bunds lower on tighter policy expectations

By Marius Zaharia

LONDON, March 30 (Reuters) – Greek and Portuguese bonds
underperformed on Wednesday and were set to drift even lower
with no resolution in sight for the debt crisis, while Irish
paper got some respite ahead of key banking stress tests.

Standard & Poor’s downgraded Greece and Portugal on Tuesday,
citing risks the countries’ debts to a new European bailout fund
would be repaid before bond investors, spurring further rises in
yields that were already testing fresh highs. [ID:nLDE72S1LY]

European leaders agreed last week to replace the euro zone’s
current bailout fund with a new European Stability Mechanism
(ESM) from 2013, which will have preferred creditor status.

The credit rating agency, which now rates Portugal one notch
above junk and sees Greece as less creditworthy than Egypt, said
Portugal was likely to follow Greece and Ireland in asking for
international aid.

S&P said the new financial rescue fund was a negative “game
changer” for debt-ridden countries and private holders of their
debt, and was also likely to lead to a downgrade for Ireland.
[ID:nLDE72S27P]

It did not downgrade Ireland on Tuesday “because they (S&P)
are waiting for the results of the stress tests” on banks, said
Alessandro Giansanti, an ING strategist.

Greek/German 10-year bond yield spreads (GR10YT=TWEB: Quote, Profile, Research)
(DE10YT=TWEB: Quote, Profile, Research) widened 7 basis points on the day to 956 bps.
Equivalent Portuguese spreads were stable at 489 bps, while
Irish spreads were slightly tighter on the day at 678 bps.

Giansanti said he expected the stress tests to reveal the
Irish banking sector needs less capital than the 35 billion
euros set aside by the government, but added that may not be
enough to move Irish yields onto a sustainable downward path.

“It’s too late for that. It would be difficult to find a huge
spread tightening trend in Ireland as long as there are (debt
restructuring) fears. Only very good GDP growth data would make
a difference there,” he said.

Traders said brief dips in Irish yields were possible if the
final figure came within a range of 20-30 billion euros.

S&P rates Ireland three notches above Portugal, although
Irish yields trade 200-300 bps higher, hence the muted immediate
market reaction.

“The market has taken them (the rating cuts) on board but
we’re getting to a stage where a lot of the bad news is already
in there,” said Eric Wand, strategist at Lloyds Bank.

“Portugal’s got scope to converge to Irish levels, but not
overnight, of course.”
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Euro vs. peripheral bond spreads http://r.reuters.com/neq78r Euro zone credit ratings http://r.reuters.com/pyh48r Euro zone debt struggles http://r.reuters.com/hyb65p Greek, Irish, Portuguese yld curves: http://link.reuters.com/bec78r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> Bund futures (FGBLc1: Quote, Profile, Research) were last 26 ticks down on the day at
121.24, tracking losses in U.S. Treasuries triggered by a
Federal Reserve official saying it should trim its bond-buying
campaign, and a weak five-year note sale. [US/]

“The Fed was hawkish and that is weighing on Bunds as well,
it’s reminding people the ECB (European Central Bank) is going
to hike next week,” one trader said.
(Reporting by Marius Zaharia; Editing by Catherine Evans)

EURO GOVT-Greece, Portugal under pressure; Ireland in focus