ECB steps in to cut Portuguese bond cost
Published 19/02/2011 | 05:00
THE European Central Bank (ECB) was back in the bond market last night, buying Portuguese government debt in an effort to cut the country's cost of borrowing and prevent another eurozone rescue.
The ECB stepped in after the yield on Portugal's five-year bonds rose above 7pc for the first time.
The yield, or interest cost, on Portugal's 10-year government bonds has been above 7pc for the past eight days. That level is seen as unsustainable by economists. Paying a similar rate to borrow for five or 10 years means the country is considered almost as likely to default within five years as it is in 10.
The ECB responded by buying the five-year bonds and bringing down the yield, market sources said.
The 10-year yield ended yesterday better at 7.36pc, down from a high of 7.447pc. The difference between Portugal and Germany's cost of borrowing reached 4.38pc yesterday, threatening the 4.5pc level at which extra charges are imposed for using the bonds as collateral in financial.
The EU has already discussed a rescue plan for Portugal. However, the country has so far refused aid.
One theory in the market is that Portugal is holding out until eurozone leaders agree to cut the cost of rescue loans.
Ireland is paying 6pc to borrow from the European Financial Stabilsation Fund, more than Portugal's average borrowing cost.
Analyst Padhraic Garvey of ING estimates that Portugal has around €10bn in cash to help deal with the crisis, as well as €6bn it raised in the debt market earlier this year.
Germany signalled that it was treating the latest crisis seriously last night. German finance minister Wolfgang Schaeuble said his country would aid eurozone members in trouble if they agreed to structural reforms such as cutting public pensions, he told Japan's financial newspaper 'Nikkei'. Japan has emerged as the key lender to Europe's bailout funds.