Portugal and beyond: dissecting credit risk through Eurozone bond spreads

Abstract

This study analyzes the determinants of sovereign bond spreads in the Eurozone, focusing on Portugal and Spain. Using a Weighted Least Squares (WLS) approach, the study examines macroeconomic factors – GDP growth, unemployment, debt-to-GDP, inflation – and political events. Portugal’s spreads remain consistently narrower than Spain’s, driven by fiscal discipline, market dynamics, and ECB interventions, such as the Pandemic Emergency Purchase Programme (PEPP). The scarcity of Portuguese bonds further compressed spreads. Political instability and economic recessions in Spain contributed to widening the spread differential. The findings offer critical insights for investors and policymakers on the role of fiscal stability and market constraints.