Portugal passes crucial bond test

 

Portugal sold €599 million of 10-year debt at an average yield of 6,716 per cent today.

This was lower than the 6.806 per cent yield it paid at its previous sale on November 10th, suggesting investor fears the country may need a bailout is easing.

Some €650 million of four-year paper was also sold at an average yield of 5.396 per cent, up from the 4.041 rate at the previous sale.

Portugal is widely seen as the next euro zone weakling that will need a financial bailout following in the wake of Greece and Ireland.

Caution over the auction and a debt sale due tomorrow by Spain capped the euro against the dollar in Asian trade as investors waited to see what yields investors would demand to risk their capital.

The country plans to launch a new bond worth at least €3 billion via a banking syndicate in the first quarter.

Traders said the ECB was active in the debt market yesterday buying Portuguese bonds as part of a plan to stabilise volatile peripheral debt markets.

Although Portugal's debt auction was successful, markets will focus on how long the country can maintain such borrowing levels.

The Government is paying an annual interest of some 5.51 per cent on the loan it received from the European Financial Stability Fund and a projected 5.7 per cent average interest rate on all its bailout loans.

Portugal's prime minister Jose Socrates has repeatedly denied any intention of seeking a bailout and is focusing on cutting the budget deficit and on measures, such as boosting exports, to raise economic growth.

Spain is also expected to pay a hefty premium to sell up to €3 billion of 5-year bonds tomorrow. In Italy, the euro zone periphery's most liquid debt market, yields rose to a two-year peak yesterday.

Investor concerns over Portugal focus on its ability to rein in its debts and create sustainable economic growth.

The minority Socialist government's austerity drive, including 5 per cent wage cuts for civil servants and tax hikes, aims to cut the budget deficit to 4.6 per cent of gross domestic product this year.

The government said yesterday that it beat last year's 7.3 per cent budget deficit goal. But the central bank said the austerity will throw the economy back into recession after estimated growth of 1.3 per cent last year.

Reuters