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Portugal making early return to debt market

Published on 23/01/2013

Portugal launched on Wednesday its first medium-term debt issue since receiving an international bailout in May 2011, making the critical step of returning to the borrowing markets much quicker than expected.

According to several business media, the five-year bond issue, the first since February 2011, began early on Wednesday with the target of raising 2.0 billion euros ($2.7 billion).

The country’s debt management agency IGCP said late on Tuesday it had mandated four banks to launch “in the near future” the borrowing via a syndicated loan.

Such an operation, which consists of borrowing from a group of banks selected in advance which then try to sell the debt on to other investors, would be an important gauge of market interest and confidence in Portugal’s debt.

Dow Jones Newswires reported that by mid-morning the demand had reached 8.0 billion euros and that the rate of return to investors was expected to be about 5.0 percent.

Rising borrowing costs pushed Portugal into taking a 78-billion-euro bailout in May 2011 from the European Union and International Monetary Fund.

It has since only been able to borrow on short-term debt markets, but the EU and IMF had planned for Lisbon to begin to start financing itself on markets again in September this year when it must make its first debt payment not covered by bailout funds.

In a sign of growing investor confidence, the rate of return to investors on Portugal’s 10-year bonds fell on Tuesday under 6.0 percent on the secondary market for the first time since December 2010.

The yield on Portugal’s 10-year bonds rose to as high as 17 percent in January 2012.

A 6.0 percent interest rate is seen as a key threshold above which a country in a low inflation and low growth environment will have difficulty supporting its debt.

Investors could also take reassurance on Tuesday from news that Portugal had met its 2012 public deficit target of 5.0 percent of gross domestic product.

Portugal was required to make sharp spending cuts and tax rises to receive the EU-IMF in order to return its public finances to a sound footing.

— Prospect of ECB support and debt easing —


“It is a big step in the right direction, but full market access is more than ‘just’ reopening a five-year bond,” said Commerzbank analyst David Schnautz.

“A ‘return to the markets’ is a road on which one moves gradually, but this operation evidently has great symbolic value,” said Rui Paulo Santos, an economist at BPI bank.

Among the factors which enabled Portugal to push up its return to the markets “it must be underlined the promise of unlimited support from the European Central Bank,” he noted.

The ECB unveiled last year its so-called OMT programme, which is for eurozone countries implementing a bailout or precautionary programme and borrowing on long-term debt markets.

Once it has returned to the debt markets Portugal would be to ask the European Central Bank to buy its bonds under its as-yet untested OMT programme.

ECB intervention would give investors confidence they could sell the bonds later if they wanted without major losses.

Portugal also received the support Monday of eurozone finance ministers to have the repayment period of its bailout loans extended in order to improve its finances and ease its return to debt markets.

EU finance ministers could make a final decision on Portugal’s loans by March. Greece had the repayment period on its bailout loans extended last year, with Ireland and Portugal promised similar treatment on their bailout loans.

Schnautz said that such developments were “supportive, underlining that if need be, Portugal will be supported.”