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Portugal bond auction heralds eurozone turnaround

Published on 09/01/2014

Bailed-out Portugal's borrowing costs tumbled Thursday as it wowed markets with a successful 3.25-billion-euro ($4.4 billion) government bond sale, heralding a comeback for the debt-ridden laggards of the eurozone.

After years of budget cuts and tough reforms to curb soaring debt — which unleashed mass protests — fresh hope for economic recovery in Portugal, Spain, Ireland and Italy appeared to have won over buyers on the bond market.

Portugal’s return to the market coincided with similar success for Spain’s first big debt auction of 2014 and came two days after a popular bond sale by Ireland.

“The risk associated with the eurozone has reduced significantly in the past few months,” said Christian Parisot, an economist at Paris-based investment bank Credit Agricole CIB.

European Central Bank president Mario Draghi urged caution, however, as the bank held its key interest rate at a record low of 0.25 percent.

“The recovery is there but it is weak, modest and fragile, meaning that there are several risks — financial, economic, geopolitical, political — that could undermine easily this recovery,” the ECB chief warned in Frankfurt.

“It is still premature to declare any victory,” Draghi said.

Portugal’s bond sale showed it can raise its own financing as it prepares to exit a 78-billion-euro bailout programme on May 17, less than three years after it was thrown the international lifeline.

Investors clamoured for the freshly issued Portuguese five-year bonds, which were sold via a syndicate of banks with a yield of 4.657 percent.

It was the first such sale by Lisbon since January 2013, when the rate of return was higher, at 4.891 percent.

Falling sovereign yields help to boost economies, spilling over into cheaper loans for business while easing the pressure on governments to impose yet tougher austerity measures on their people.

“There is a broad strong market sentiment which is getting ever more robust and resilient which is positive for the eurozone periphery,” said Christian Schulz, senior economist at German private bank Berenberg.

Spain’s borrowing costs plunged, too, as it raised 5.3 billion euros in an auction of five- and 15-year bonds. The five-year rate dropped to just 2.382 percent on Thursday from 2.697 percent three weeks earlier.

Day-to-day trading on the secondary markets was more dramatic, with the Spanish five-year bond yield plunging as low as 2.213 percent — the lowest since it joined the single currency — from 2.326 percent the evening before.

Spain emerged timidly from recession in the third quarter of 2013, with official data showing growth of 0.1 percent, although the unemployment rate remains very high at 26 percent.

Ireland took a major step on the road to economic recovery on Tuesday with its first bond issue since exiting its international rescue programme.

The yield on Ireland’s 10-year government bond in the secondary market fell on Thursday to 3.536 percent from 3.541 percent the previous day.

After the international bailouts for Portugal and Ireland, economists warned that Spain or even Italy could be next.

The jitters prompted the European Central Bank to promise it would prevent struggling countries dropping out of the eurozone and defend the single currency come what may.

Economists say this and the tough economic reforms have put the eurozone on the path to recovery.

“Ireland, Portugal, Spain are racing ahead because they have done their homework, they have had their bailouts, they have had their reforms, they had them early,” Schulz told AFP.

“Italy is following, it had its reforms a bit later than the rest and maybe not as strong as the rest,” he added.

“And Greece and France are behind. Greece because its problems are simply much bigger and France because it has not acted yet.”

On the 10-year government bond market, Greek yields eased to 7.705 percent from 7.710 percent. Italian yields crept up to 3.896 percent from 3.884 percent. French yields edged up to 2.558 percent from 2.510 percent.