ECB intervenes in bond markets as debt crisis threatens Portugal

THE EUROPEAN Central Bank has intervened in euro zone bond markets for the first time in weeks, buying Portuguese debt amid fears that the country could yet seek an international rescue.

The ECB returned to the market yesterday as Portugal’s cost of borrowing on 10-year debt jumped to a euro-era high of 7.63 per cent, traders said. The ECB temporarily suspended its bond-buying programme in mid-January.

Lisbon blamed “speculation against the euro” for the increase in Portugal’s yields and called for a joint European response to “return markets to normality”.

“This is a challenge to the EU and the euro zone that requires an adequate European response,” said Pedro Silva Pereira, a minister and cabinet spokesman.

He said “good progress” in reducing the budget deficit was not yet being reflected in bond yields, but insisted that the government would not need to turn to the European Union or International Monetary Fund for financial assistance.

Although there were no signs of fresh efforts by European officials to push Portugal to accept a bailout, senior EU officials have been concerned for weeks that Lisbon has still not done enough to reassure financial markets.

Some EU member states and the IMF have urged Portugal to accept a bailout, arguing that a quick decision will limit the size of the aid package.

Many policymakers and investors say that Portugal’s cost of borrowing for 10-year debt is unsustainable above 7 per cent, a level above which it has remained for the past week. The ECB buying, in small amounts, reversed the move higher. Yields, which move inversely to bond prices, fell back to 7.29 per cent.

Investors have grown more concerned about Portugal on the grounds that European leaders may fail to live up to market hopes for a beefing-up of the euro zone’s bailout fund and improved economic co-ordination between member states.

Portugal’s first bond syndication in a year, launched on Monday, has traded poorly in the secondary markets. The five-year €3.5 billion bond attracted strong demand when it was priced, but has subsequently seen selling from hedge funds.

“This is the trend Portuguese yields have been following since November,” said Filipe Silva, head of debt trading with Portugal’s Banco Carregosa. “If the ECB wasn’t in the market buying, the price would be much higher.”

Enam Ahmed, a London-based analyst with Moody’s, the rating agency, said Portugal’s high fiscal deficit, poor economic prospects and large debt refinancing needs were putting the country back in the spotlight.

Mr Silva said Portugal could avoid a bailout as long as it was able to continue issuing debt. – (Copyright The Financial Times Limited 2011)