Market Extra: Why Portugal could be Europe’s next economic disaster

First it was Brexit, then it was the Italian banking sector, and now it’s Portugal’s surprisingly slow growth that’s threatening the stability of Europe’s financial system this summer.

Over the past few weeks, fears have mounted that the country’s weak economy will prompt a credit ratings downgrade, making Portuguese bonds ineligible for the European Central Bank’s quantitative easing program. Those jitters have pushed up the yields on Portuguese government paper, with the yield on 10-year debt TMBMKPT-10Y, +0.53% jumping above 3% this week. That’s up from around 2.3% less than a year ago.

“The sharp rise in Portugal’s bond yields [this month] reflected justified concerns about the government’s credit rating,” said Jack Allen, European economist at Capital Economics, in a note.

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