Portugal bond sale a success despite rising bailout fears
Published 13/01/2011 | 05:00
PORTUGAL managed to borrow €1.25bn in the markets yesterday thanks to a co-ordinated effort from across the EU, but the 6.716pc paid to borrow some of the money looks unsustainable in the long term.
Spain is borrowing in the market today and the lack of any real resolution to the crisis means there is still huge danger that the European debt will see both countries needing bailouts.
Portugal's borrowing included €599m of 10-year bonds at an average yield of 6.716pc. The yield, or interest, is lower than 6.806pc Portugal paid at the previous sale in November.
It also borrowed €650m of bonds due in 2014 at a yield of 5.396pc, up from the 4.041pc it was charged in October.
The Portuguese bond auction succeeded despite fears the country would be forced to seek help from the EU and IMF after the yield on its 10-year bonds rose from 6pc at the start of the year to 7.4pc last Friday.
"What happened was a wonderfully co-ordinated effort by the authorities that succeeded in bringing down the yield ahead of the auction," said Gary Jenkins of Evolution Securities.
He said well-timed leaks by the European Central Bank (ECB) let bond investors know the bank was buying Portuguese bonds -- driving down the yield.
He said an announcement that Japan would buy EU bonds and European Commissioner Olli Rehn's suggestion in the 'Financial Times' newspaper yesterday that the European Financial Stabilisation could be increased and could buy countries' bonds also helped set the scene for a success, he said
"This was one of the few occasions where we saw them (EU leaders) join the dots and it worked," Mr Jenkins told the Irish Independent.
Nick Firoozye, of Japanese bank's Nomura London office, told a conference in Lisbon that the ECB had spent between €1bn and €1.5bn buying government bonds in the two days before the auction, highlighting the scale of the effort.
Padhraic Garvey, at ING Bank in Amsterdam, warned against assuming the debt crisis had passed after one successful auction. He said the banks that managed the deal for Portugal set it up to be a success after they sold bonds before the deal to clear space to buy the new paper.
"The test is not the auction, the test is whether the rates being charged fall after the auction once the ECB steps away," he told the Irish Independent.
Mr Garvey said the efforts made to get Portugal's deal over the line were being made because policy makers could not allow the crisis to go farther than Portugal and Spain.
A common bond would be a step towards full economic union but would make it impossible for investors to try to pick off the weak points in the eurozone, he said.
The biggest bond investor in the world said the yield Portugal is paying after yesterday's auction is not sustainable.
Bill Gross, who manages Pacific Investment Management Co (PIMCO) said: "Portugal did sell a 10-year at slightly under 7pc, but that to me is not a successful yield. It speaks in the long term to Portugal not being able to service its debt simply because its primary deficit is increasing based upon its high yields," he added.