Portugal faces bond test

2011-01-12 10:54

Lisbon - Portugal on Wednesday makes its 2011 debut on the long-term debt market, but it may not be its last as reported aggressive intervention on the markets by the ECB might help it escape a bailout.

Portugal has been beset by speculation that its eurozone peers want it to accept a bailout so as to avert a wider crisis that could drag down others, including neighbour Spain, after Greece and Ireland sought help in 2010.

Lisbon has been widely considered the next eurozone country likely to succumb to the pressure of its deficit and debt given its anaemic growth, and investors pushed Friday its 10-year bond yields up to a record 7.193%, an interest rate most analysts consider unsustainable.

Wednesday's debt auction marks Portugal's first foray into the bond markets since Ireland was forced to seek an EU-IMF bailout in November, with the expected sale of €750m to €1.25bn worth of long-term debt.

But the yield on its 10-year bonds fell to 6.805% late on Tuesday amid renewed market rumours that the European Central Bank (ECB) had made massive purchases to calm markets.

"The ECB seems to have understood the issue that Portugal's return to the market was important enough to intervene and calm the situation," said Natixis bond strategist Cyril Regnat.

The latest information published by the ECB shows it purchased only €113m of eurozone bonds last week in its controversial programme to support the functioning of debt markets, but Societe Generele CIB estimates it made €1bn in purchases alone on Monday.

"This has had an impact on the market and we expect the Portuguese auction tomorrow should in principle be successful," said Vincent Chaigneau, head of fixed income research at Societe Generale CIB.

'Deep sense of deja-vu'

"For us, the real test will come with the syndication of peripheral states," he added, when syndicates banks underwrite the sale of the bonds instead of selling them via a public auction.

Many analysts see any ECB-inspired debt relief as temporary at best, and that it is highly likely Portugal will eventually need to seek a bailout.

Portugal insisted on Tuesday it would not need a bailout even as its central bank forecast the economy would plunge into recession with a 1.3% contraction this year, making the task of restoring strained public finances all the more difficult.

It has to cover €20bn in debt due by mid-2011.

But Finance Minister Fernando Teixeira dos Santos said Portugal did not intend to seek external help and "would do everything to avert such an eventuality."

Portugal's government is trying to squeeze its public deficit down from 7.3% of gross domestic product in 2010 to 4.6% this year, which is still well above the EU 3% limit.

Lisbon's total accumulated national debt stood €143bn in 2010, or 83.3% of GDP - above the EU limit of 60%.

EU diplomats say Portugal has come under heavy pressure from several European countries to accept outside help amid concern that a fresh eurozone debt crisis might spread to Spain, a far larger economy.

Spain also plans its first long-term issues of the year on Thursday, raising €2bn to €3bn in five-year bonds. Its benchmark 10-year bonds were yielding 5.607% early on Tuesday.

As the pressure has mounted on Portugal there have been repeated rumours that a rescue was imminent, quickly followed by denials.

Analysts say this has prompted a "a deep sense of deja-vu" of the run-up to the Ireland and Greece bailouts.