Portugal debt cost seen up, but no bailout trigger
Portugal is likely to pay record high premiums to place its debt on Wednesday, but recent bond buying by the European Central Bank should avert a dramatic rise in yields to levels that could make the country seek a bailout.
January 12, 2011 / 09:34 IST
Portugal is likely to pay record high premiums to place its debt on Wednesday, but recent bond buying by the European Central Bank should avert a dramatic rise in yields to levels that could make the country seek a bailout.
The heavily-indebted Iberian country faces the bond markets for the first time in 2011 and needs to convince investors that it can keep financing itself without seeking EU financial aid or provoking contagion effects for the much bigger Spanish economy.But after hitting euro lifetime highs of 7.3% in the secondary market last Friday, the yield on Portugal's benchmark 10 year bond has come down to just below 7% at Tuesday's settlement, with traders citing ECB purchases.On Wednesday, the country that is widely seen as the next euro zone weakling to seek a bailout after Greece and Ireland, is offering a total of between 750 million euros (USD 972.1 million) and 1.25 billion euros in four- and 10 year bonds."The market will take it down primarily because of what the ECB is doing. The ECB appears to be proactive enough and we've seen tightening in Portuguese yields so far this week," said Peter Chatwell, rate strategist at Credit Agricole in London.Still, the borrowing costs should hit a new euro lifetime auction record of around 7% for the 10 year bond, up from 6.806 percent in the previous sale in November. Bonds maturing in October 2014 yield 5.81% in the secondary market, up from 4.04% in the previous auction in October."Growing yields in the auctions all add to longer-term concerns about debt and liquidity, but it's not like it's going to be a make-or-break auction," said Chatwell.BNP Paribas analyst Ioannis Sokos said he was not worried about demand at the auction or the yields after the ECB buying."I expect the auction to be already sold, with domestic demand enough to cover supply, but it doesn't mean that concerns will go away ... The next big test will be the syndication placement and peer pressure on Portugal to take aid," he said.The country plans to launch a new bond worth at least 3 billion euros via a banking syndicate in the first quarter.A senior euro zone source said at the weekend that pressure is growing on Portugal from Germany and France to seek financial help from the European Union and International Monetary Fund.Both countries have denied any pressure and Germany also said European Union aid for Portugal is not on the agenda of next Monday's meeting of finance ministers from the bloc.A Reuters poll of economists last week showed most expect Portugal to need a bailout. Portugal's Prime Minister Jose Socrates has repeatedly denied any intention of seeking a bailout and is focussing on cutting the budget deficit and on measures, such as boosting exports, to raise economic growth.Analysts say the question for Portugal is how long it can afford to finance itself at current high rates, particularly in view of a 4.5 billion euros bond redemption due in April."The current situation is not sustainable forever," said Filipe Silva, debt manager at Banco Carregosa in Porto.Spain is also expected to pay a hefty premium to sell up to 3 billion euros of 5-year bonds on Thursday. In Italy, the euro zone periphery's most liquid debt market, yields rose to a two-year peak on Tuesday.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% wage cuts for civil servants and tax hikes, aims to cut the budget deficit to 4.6% of gross domestic product this year. The government said on Tuesday it beat last year's 7.3% budget deficit goal.But the central bank said the austerity will throw the economy back into recession after estimated growth of 1.3% last year. That would make budget targets harder to meet and possibly stir opposition to spending cuts. Unions held a general strike late last year. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
