Portugal pays high rates to raise fresh funds

Struggling Portugal managed to raise fresh funds Friday to cover its mounting debt, paying sharply higher rates of interest to do so but much less than the markets had expected.

The national debt agency said it raised 1.645 billion euros ($2.33 billion) in one-year bonds at an average yield — the return paid to buyers — of 5.793 percent, well below analyst forecasts for rates of up to 6.4 percent.

The offer was 1.4 times oversubscribed, the debt agency said.

At a one-year bond auction on March 16, however, Portugal paid 4.331 percent, up from 4.057 percent on March 2, after Moody’s slashed the country’s credit rating on fears it would not be able to repay debt.

Rates above 5.0 percent on such short-term debt are considered very high and reflect market concerns that Portugal will likely need external help to overcome its debt and deficit problems.

Rates on benchmark Portuguese 10-year bonds meanwhile have jumped above 8.0 percent, an unsustainable level for the long-term, after parliament last week rejected the government’s latest austerity package, forcing its resignation and sparking a series of further sharp credit downgrades.

Figures Thursday added to the gloom, showing that Portugal chalked up a 2010 deficit equal to 8.6 percent of Gross Domestic Product, way above its target of 7.3 percent and making it even more unlikely it will meet the 2011 goal of 4.6 percent.

The EU public deficit limit is 3.0 percent

Given the bad news backdrop, analysts said Friday’s exercise was a relative success but the rates paid, if less than expected, were still too high.

“You could say it was a success … the rate was less than what the market was wanting of close to six percent … and 6.5 percent (on Thursday),” said Felipe Silva, bond strategist at Banco Carregosa.

“However, that is still too high for such short-term paper,” Silva said, adding: “Portugal has gained a little time but outside help remains virtually inevitable.”

Greece and Ireland had to be bailed out by the EU and International Monetary Fund last year with hundreds of billions of euros to avoid a debt default that many analysts feared would spread, scuttling the eurozone.

Like Banco Carregosa’s Silva, they believe Portugal cannot balance its books despite stringent austerity measures and so will have to seek help sooner rather than later as the EU tries to bolster the euro’s defences.

Finance Minister Fernando Teixeira dos Santos, responding to such views, said Thursday that the outgoing government had no authority to negotiate a rescue deal and Lisbon was not in any case at risk of bankruptcy.

“I do not think that bankruptcy is a serious risk,” Teixeira dos Santos told private TVI television.

The government “must secure the means for the country to fulfill its obligations,” he said, adding without elaboration that “we must be more creative.”

President Anibal Cavaco Silva announced Thursday that a general election would be held on June 5, the polls taking “place at a critical moment for the life of the country.”