LISBON, Portugal — Portugal cleared a major
hurdle Wednesday as it easily tapped investors
for cash, though fears remain that the debt-laden
country may yet require a financial rescue — a
fact ominously highlighted by the EU's proposal
to boost the size and powers of its financial
bailout fund.
Markets showed relief that the country managed
to borrow euro1.25 billion ($1.62 billion) in a bond
auction and that it ended up paying a far lower
rate for its longer-term debt than previously. The
government debt agency said it sold euro650
million in bonds with a 2014 maturity and
euro599 million in 2020 bonds and demand for
both was high.
The major source of relief came because the yield
on the 2020 bond dropped to 6.716% from
6.806% in November. Some of that relief was
dampened by the revelation Portugal had to pay
a much higher rate of 5.4% rate for the shorter-
term bond, compared with the 4.041% yield in
October, when Ireland's need for a bailout had
not yet roiled markets.
Analysts said the success of the auction has a lot
to do with a more active role taken by the
European Central Bank as well as recent pledges
of support from Japan and China.
However, Portugal isn't out of the woods and
many analysts believe the country will end up
having to accept a bailout, partly because it is
expected to sink back into recession this year as a
result of austerity measures to get public finances
into shape and because borrowing costs remain
high.
The bond sale "is one hurdle that has been
overcome, but it's not the end of the problems
for Portugal and the eurozone," said Ian
Stannard, an analyst at BNP Paribas. "This auction
is not going to make the problems go away."
Portugal is a small country with few clear
avenues for growth and has to raise up to euro20
billion ($26 billion) this year alone to cover debts.
Some analysts think Portugal should accept the
inevitable and agree a package from its partners
in the European Union and the International
Monetary Fund instead of constantly fire-fighting
in the bond markets.
Simon Derrick, an analyst at the Bank of New
York Mellon, says it may be better for Portugal to
agree to a financial bailout sooner, on its own
terms, rather than be forced into that position
later.
The government shows few signs of taking that
route, insisting it can get a handle on its debt
through its program of tax cuts and pay cuts.
And Finance Minister Fernando Teixeira dos
Santos has expressed frustration at what he sees
as a lack of help from fellow European nations to
keep Portugal from resorting to a rescue. A
bailout is a significant blow to a country because
the government effectively loses control of its
fiscal policies.
Policymakers and experts have been critical of the
eurozone's handling of the debt crisis, specifically
a lack of leadership, timely decision making and
guiding rules.
With Portugal still dangerously close to requiring
financial help and fears Spain could be next,
markets will look to see what the 17 eurozone
finance ministers agree next week in a meeting in
Brussels.
The European Union's top monetary official, Olli
Rehn, said Wednesday that the euro440 billion
($570 billion) bailout fund for debt-ridden
countries should be increased and given more
powers. Rehn said discussions with the 17
eurozone governments on boosting the size of
the fund were ongoing and there was progress.
Analysts fear the fund might be too small if a big
economy like highly indebted Spain runs into
financial trouble. Both Spain and Italy are due to
hold bond auctions Thursday.
Emergency support for Spain would test the
limits of the existing bailout fund, potentially
putting the euro project in jeopardy if
governments don't put up more cash. The
country accounts for more than 10% of the
eurozone economy, whereas Greece, Ireland and
Portugal only account for around 2% each.
Pylas reported from London. Gabriele Steinhauser
in Brussels also contributed to this story.
Source: Http://www.usatoday.com/money/world/2011-01-12-portugal-bond-sale_N.htm
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