Portugal sold six-month bills today, the first of Europe's high-deficit nations to test investor demand in 2011 after the threat of default forced Greece and Ireland to seek bailouts last year.
The government debt agency, known as IGCP, auctioned €500 million of bills repayable in July. The yield jumped to 3.686 per cent from 2.045 per cent at a sale of similar maturity securities in September, with investors bidding for 2.6 times the amount offered. A year ago, the country paid just 0.592 per cent to borrow for six months.
"We have a long year ahead, and one auction is not going to answer any questions," said Padhraic Garvey, a strategist at ING Groep NV in Amsterdam. "Getting paper into the market doesn't mean the crisis is over. It just means job well done this time, and next month it's got to be done again."
Portugal, which intends to sell as much as €20 billion in bonds to finance its budget and redemptions this year, is raising taxes and cutting wages as it tries to convince investors it can narrow its budget gap after the Greek debt crisis led to a surge in borrowing costs for indebted euro nations last year.
Ireland in November became the second euro country to seek a bailout and the first to request aid from the European Financial Stability Facility.
European nations that have already sold bills this year include France, Belgium, the Netherlands and Malta, with Germany also holding an auction today. Austria's debt agency canceled a scheduled January 11 bond auction, opting instead to sell debt via a syndicate of banks later this month.
The difference in yield between Portuguese 10-year bonds and German bunds, Europe's benchmark, reached a euro-era record of 484 basis points on November 11th. The spread is currently about 376 basis points, up from 362 a week ago. The Greek yield premium to bunds widened to a record 974 today.
Portugal doesn't face any bond redemptions until April, with repayments that month and in June worth about €9.5 billion. The nation's debt agency estimates this year's gross financing needs will be €3 billion lower than in 2010, and plans to sell a new bond through banks in the first quarter.
Spain will sell €93.8 billion of bonds this year, compared with €93.5 billion in 2010, while Italy's
borrowing needs will decline to €225 billion from €249 billion, according to figures compiled by Barclays Capital.
The Portuguese government is taking the necessary measures so that it doesn't have to request aid, Finance Minister Fernando Teixeira dos Santos said on December 15th. The 2011 budget includes the deepest spending cuts in more than three decades. In September, the government said it would trim the wage bill by 5 per cent for public-sector workers earning more than €1,500 a month, freeze hiring and raise value-added sales tax by 2 percentage points to 23 per cent to help narrow a deficit that amounted to 9.3 per cent of gross domestic product in 2009.
Portugal's debt rating was cut one level by Fitch Ratings on December 23rd, which said the economy faces a "deteriorating" outlook. The grade was lowered to A+, the fifth-highest level, from AA-. Fitch said the outlook for that assessment is negative, meaning it is more likely to worsen than improve.
Moody's Investors Service on December 21 said Portugal's bond rating may be downgraded one or two levels because budget cuts may worsen the country's "sluggish" economic growth. Moody's cut Portugal's credit rating two steps to A1 on July 13th. Standard and Poor's said on November 30th it may lower the country's rating, having already cut it to A- from A+ in April.
Bloomberg