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Portugal denies need for eurozone bailout ahead of bond auction PDF Print E-mail
News - Latest
Tuesday, 11 January 2011 13:03

Portuguese yields may be rising to levels that force the nation to follow Greece and Ireland in requesting a bailout from the European Union and the International Monetary Fund to avert default, it appears.

The nation plans a 10 year sale tomorrow (January 12), the first bond auction by any of the euro region’s most indebted countries this year. Its existing 10 year debt has yielded more than 7% in 10 of the past 62 days, according to Bloomberg data. Greece needed a rescue within 17 days of its 10 year yield breaching 7% on April 6, while Ireland lasted less than a month after it cracked that level in October.

‘Even if we see a successful auction, it doesn’t mean anything, because at rates above 7% it’s not sustainable. It is inevitable that Portugal has to turn to the EU and IMF if they keep borrowing at these levels,’ said Ioannis Sokos, a strategist at BNP Paribas in London.

The cost of insuring European sovereign debt has climbed to a record on concern backstopping the region’s banks will overwhelm government finances. Countries including Spain, Italy, the Netherlands and Germany will hold bond and bill sales worth as much as €42 billion this week. Portugal’s six month borrowing cost jumped to 3.686% at a bill sale last week, up from 2.045% in September.

Portuguese Prime Minister Jose Socrates said today his government will not ask for aid and that talk of a bailout is only helping speculators. He also said last year’s budget deficit will be lower than the government had forecast.
   Japan said today it would buy bonds tied to a bailout fund for indebted European nations, echoing pledges by China to help stem the region’s debt crisis.

'In this environment, each auction by Portugal and Spain is seen by the market as a referendum on its likelihood of continuing without rescue. People aren’t looking for a failed auction, it’s the rate they’re looking at,’ said Toby Nangle, who helps oversee $46 billion as director of asset allocation at Baring Asset Management in London.

Portugal plans to borrow as much as €1.25 billion tomorrow by issuing debt repayable in October 2014 and June 2020, the nation’s debt agency said. The following day, Spain will auction as much as €3 billion of five year bonds, while Italy will market €6 billion of securities maturing in 2026 and 2015.

The Netherlands issued €3.5 billion of debt with Germany seeking €7 billion tomorrow. Greek and Italian borrowing costs rose and demand waned at sales of almost €9 billion of bills today.

A bailout for Portugal may oblige Germany to end its objections to expanding the region’s €750 billion rescue facility, or to bond issues that are guaranteed by all euro members, according to Christoph Rieger, head of fixed income strategy at Commerzbank in Frankfurt.

‘Portugal will be the crucial test. They’ll have to come up with a multiplying of the bailout money or something like a common bond to turn things around,’ he explained.

Weakness in Portuguese bond markets spilled over to the other most indebted euro nations in recent months. The Spanish 10 year bond yield climbed from a five month low of 3.95% on Oct. 12 to 5.54% yesterday. The equivalent Italian yield was at 4.85% from a 2010 low of 3.73%.

 

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