Demand strong for bond, but bailout worries linger
LISBON (AFP) ― Portugal said it passed a key test on Wednesday with a successful bond sale but analysts were cautious, arguing that a bailout remains a real possibility to ease its debt problems ― and those of the eurozone.
The government raised 1.25 billion euros ($1.6 billion), the maximum it sought, attracting strong interest and slightly lower rates for the long-term bonds ― proof it said, that Lisbon was a credible, trusted borrower.
“One of the conclusions to draw ... is that Portugal is still able to access the financial markets, that there is a demand for its bonds, that it can get rates which are acceptable and even favorable, given the context,” Finance Minister Fernando Teixeira dos Santos said.
“Given all that, seeking external help is not necessary,” dos Santos said.
The fear had been that the sale would flop, forcing Portugal to seek a bailout which would put additional pressure on Spain and strain the whole eurozone project to breaking point, analysts said.
A pedestrian walks past the Central Bank of Portugal in Lisbon. (Bloomberg)
In the event, they said European Central Bank buying of Portuguese bonds before the sale, together with strong Chinese and Japanese expressions of support for the eurozone, appeared to have prevented the worst.
The Portuguese debt agency said the yield or the rate of return for investors in the bonds maturing in June 2020 came in at 6.716 percent, down from 6.806 percent at a similar sale in November.
However, on the bonds maturing October 2014 which were also offered, the yield jumped to 5.396 percent, up sharply from the 4.041 percent paid in November ― suggesting greater concerns remain in the short-term.
On the markets, the pressure on Portugal dropped after the auction.
In late trade, the yield on the benchmark 10-year Portuguese bond was at 6.771 percent, down from the close Tuesday of 6.900 percent but up from earlier deals at 6.769 percent. The bond hit a record 7.193 percent on Friday.
Yields on Spanish 10-year bonds also eased, to 5.451 percent from 5.479 percent as Madrid prepares its own offering of 2.0-3.0 billion euros Thursday.
“The sale went very well, it’s good news. We had been expecting the June 2020 bond to go at around 7.0 percent,” said Cristina Casalinho, analyst at BPI Bank in Lisbon.
At the same time, “questions remain, it is not a sale which resolves all the uncertainties over the Portuguese economy this year, especially in the first few months because the financing needs are heavy,” Casalinho told AFP.
Portugal has to raise 20 billion euros in fresh financing this year, with another 26.5 billion euros in maturing debt to be covered.
Filipe Silva, bond strategist at Carregosa bank, said that even if the lower yield was a “pleasant surprise,” the rates the country had had to pay were still “unsustainable given the potential growth rate of the Portuguese economy.
“In the long-term, the situation is not tenable,” he said.
Any interest rate over six percent is widely held to be very tough for the long-term, and above seven percent ruinous because few countries can generate a high enough growth rate to cover both the interest and the debt repayments.
On Tuesday, the central bank warned the Portuguese economy would shrink 1.3 percent this year, making the task of restoring its strained public finances all the more difficult.
BGC Partners analyst Howard Wheeldon in London said it was immaterial whether the Portuguese government thinks it can avoid a bailout.
“The point is that ... investors have already decided that Portugal requires help and that is an end of it,” he said, adding that governments can only try to buck the markets at their peril.
The euro meanwhile was at $1.3062 in late trade, coming off lows under $1.30 on news of the Portuguese bond sale and record 2010 German growth figures.
European stock markets also rose sharply, with Lisbon itself up 2.59 percent and Madrid soared 5.42 percent.
German Chancellor Angela Merkel said on Wednesday that she was pleased by the outcome, praising Lisbon for its “very impressive” austerity measures as the government tackles its debt and deficit overhang.
Portuguese Prime Minister Jose Socrates, speaking in Frankfurt, said the sale was a success, adding: “We don’t need that help because we are able to do our work by ourselves ... We are doing our work and the market knows that perfectly.”