Struggling Portugal faces fresh test on the markets

9th January 2011, Comments 0 comments

Portugal faces a crunch test next week as the debt-stricken eurozone country tries to raise fresh funds from investors who want ever higher returns, pushing it to the point where it may need a bailout.

The government insists that all is well, that its austerity measures will restore the public finances, but analysts believe it is only a matter of time before Portugal, after Greece and Ireland, with have to be rescued.

On Friday, the yield or rate of return paid to investors in Portuguese benchmark 10-year bonds jumped to 7.193 percent, the highest level since Lisbon joined the eurozone and up from 6.957 percent on Thursday.

Interest payments at these levels only compound the government's problems to get its debt and deficit back under control, and approach levels that could prove unsustainable over the longer term.

Greece in May and then Ireland in November ran into similar problems and eventually had to call in the European Union and International Monetary Fund to rescue them from default and the whole euro project from collapse.

"Nobody believes that Portugal can get out of this on its own," Thomas Mayer of Deutsche Bank said Friday.

"At this stage, it is no longer a question of whether, after Greece and Ireland, Portugal will get help, but when it will," said Filipe Silva, bond strategist at Carregosa bank.

On Wednesday, the government is hoping to raise up to 1.25 billion euros through a sale of 3- and 9-year bonds but it could have to pay a high price to get the money.

Last Tuesday, it raised 500 million euros but had to offer record rates -- 3.686 percent on the 6-month treasury bills, up from 2.045 percent at a previous auction and compared with just 0.59 percent a year earlier.

"We are in the same (situation) as at the end of 2010 -- the problem for these countries remains their sovereign debt," bond strategist at BNP Paribas bank Patrick Jacq said, referring to Portugal and Spain.

"These countries have weak growth and weak inflation. Add to that high bond yields and the cocktail is explosive," Jacq said.

The government said Thursday it had met its 2010 budget deficit target of 7.3 percent of Gross Domestic Product, down from 9.3 percent in 2009, and was on track to fully implement tough spending cuts and tax hikes.

The public deficit is set at 4.6 percent for this year, still well above the EU 3.0-percent limit, while total accumulated national debt stood 143 billion euros for 2010, or 83.3 percent of GDP -- above the EU limit of 60 percent.

Prime Minister Jose Socrates insisted on Friday that Portugal was moving in the right direction.

"Fiscal receipts (last year) were above target and spending was below target and the budget deficit will be what the government said it would be -- 7.3 percent," he said.

"That is the best news so that the international financial markets reinforce their confidence in Portugal and that is then reflected in the rates of interest we pay on our borrowing," the prime minister told parliament.

For analysts, the truth of that statement will be tested at Wednesday's bond sale.

"There will be demand for the bonds but at what price is the real question," Rene Defossez of French investment bank Natixis said of the offers due from Portugal, as well as Spain and Italy next week.

"If the rates are very high again, that will become very alarming," he said.

© 2011 AFP

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