Tuesday 6 December 2016

Portuguese and Irish bonds rally on news of bailout deal

Portugal sells €1.1bn of bills due to mature in August as banks get €12bn from rescue package

Sergio Goncalves, Steve Slater and Sarah White

Published 05/05/2011 | 05:00

Rasmus Ruffer, head of the ECB delegation, leave the Social Democrats Party headquarters in Lisbon yesterday. The main opposition Social Democrats will decide on whether to support the bailout later. Photo: Reuters
Rasmus Ruffer, head of the ECB delegation, leave the Social Democrats Party headquarters in Lisbon yesterday. The main opposition Social Democrats will decide on whether to support the bailout later. Photo: Reuters

PORTUGUESE and Irish bonds gained yesterday as the Portuguese sold €1.1bn of bills maturing in August, just as details of the Portuguese bailout began to filter out.

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The yield was up 61bps at 4.652pc. The yield at yesterday's sale was more than four times what Germany pays to borrow for six months.

The yield on 10-year Portuguese bonds fell 11bps to 9.47pc, while the cost of insuring Portuguese government debt against default fell to the lowest in two weeks.

Irish debt 10-year bond yields dropped to 9.7pc while Greek debt stayed above 15pc.

The auction was the first since Portugal agreed terms for an EU/IMF bailout worth €78bn over three years.

Full terms of the deal have not yet been disclosed but the country's banks will get up to €12bn to recapitalise under a rescue plan -- around half what was earmarked for Ireland's banks in its package -- enabling them to rebuild their balance sheet strength gradually.

The aid for the banks is part of a €78bn EU/IMF bailout deal for Portugal. Under the plan, the government would help banks to recapitalise if they are unable to meet targets by temporarily taking stakes. Unlike the Irish banks, however, the Portuguese lenders do not need massive, urgent injections.

A source close to the bailout process said banks would have to raise their core Tier 1 capital ratio -- a gauge of higher quality capital that mainly comprises equity and retained earnings -- to 9pc at the end of this year and to 10pc by the end of 2012.

Fund

To get to 9pc the top five banks would need about €2bn and require about double that to get to 10pc.

"I don't think any of the banks will need to access this fund and require state intervention [to reach 9pc]," said Prathmesh Dave, an analyst at Nomura in London.

The main threat is that stresses on banks rise and loan losses will swell as the economy worsens and margins shrink, which would depress earnings and add to the amount they need, especially if there is a prolonged recession.

The new minimum levels are higher than the Bank of Portugal's end-2011 requirement that banks hold capital of 8pc, and a global standard of 7pc, although European peers are building cushions well above that.

"The capital of these banks isn't really the main problem at the moment. The focus is their dependency on the ECB for liquidity and how they can get out of that and somehow fund themselves in the wholesale market again," said Carlo Mareels, banks analyst for RBC Capital Markets.

Portugal's banks have been unable to raise funds in wholesale markets for a year, showing how intertwined the fortunes of the state and lenders has become in peripheral eurozone countries.

That has squeezed margins as they fight for retail deposits, straining their capital positions.

The bailout memorandum still has to be approved by the main opposition parties. (Reuters/Bloomberg)

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