Spanish, Portuguese bond rates rise on debt worry

7th January 2011, Comments 0 comments

Interest rates demanded by lenders to fund Spanish and Portuguese debt rose sharply to record high levels on Friday on renewed European bond market tension over public finances in these two countries.

The rates on debt issued by other heavily indebted eurozone countries also rose. The yield on 10-year Italian debt rose to 4.806 percent from 4.767 percent on Thursday.

The rate or yield on Spanish 10-year debt rose to 5.536 percent from 5.460 percent at the close of trading on Thursday, and was at the highest level since 2000.

The equivalent rate on Portuguese 10-year debt rose to 7.161 percent from 6.957 percent, the highest level since Portugal joined the eurozone.

Bond strategist at BNP Paribas bank Patrick Jacq said: "We are in the same framework as at the end of 2010: the problem for these countries remains their sovereign debt."

He said that "these countries have weak growth and weak inflation. Add to that high bond yields and the cocktail is explosive."

Jacq said that a few months ago there was "no question" of these countries asking for help from the European Financial Stability Fund but that "maybe, they could be forced to do so soon."

The EFSF can borrow money on financial markets and use it to buy debt issued by countries which are not able themselves to borrow at bearable interest rates.

Sentiment on financial markets continues to doubt that Portugal and Spain will be able alone to correct their public finances, despite repeated official statements that they have put in place radical reforms to cut public deficits, reduce the debt, and raise the structural growth potential of their economies.

On Thursday, the Portuguese government said it had achieved its target of reducing the public deficit to 7.3 percent of gross domestic product in 2010 from 9.3 percent in 2009. The EU and eurozone ceiling is 3.0 percent.

Portugal expects its public deficit to fall to 4.6 percent of output in 2011 as a result of its structural reforms.

China has said it intends to buy debt totalling about EUR6.0 billion, the newspaper El Pais has reported.

When governments, local authorities and social welfare systems spend more than they raise, the difference is covered by the issue of sovereign debt to banks, funds and individuals wanting to invest savings in low-risk instruments.

These bonds are issued with a fixed interest for the life of the loan, set to be attractive in the immediate environment for interest rates for given levels of risk.

If subsequently perception of the risk attached to the instrument changes, for example it rises, then the value of the bond falls, and the fixed interest as a percentage of the new price rises.

This indicates the interest which the government concerned must offer when it next issues debt.

If the rate rises to the 6.0-7.0-percent range, the cost of borrowing may become unsustainable.

© 2011 AFP

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