Portugal sails through 10-year bond issue: banking source
Portugal took a big step towards shedding its bailout clothes and borrowing normally to finance its budget, with a successful 10-year bond issue on Tuesday.
The debt management agency raised 3.0 billion euros ($4.1 billion) amid strong demand of 9.5 billion for an issue of 10-year bonds in a key test of whether the eurozone country can exit cleanly its EU-IMF bailout in May, a banking source said.
The interest paid to attract the money was expected to work out at about 5.0 percent, in line with the yield indicated by trading of existing bonds on the secondary market.
The strong outcome of the tender is in line with a bond issue in January which also went well.
By May the country needs to be able to re-finance itself normally on the sovereign debt market, thereby emerging from its bailout programme of 78 billion euros ($106 billion).
That was set up by the International Monetary Fund and European Union to avoid bankruptcy in 2011, but was conditional on radical structural reforms to correct the public deficit and ramp up competitiveness.
The latest data on the trade balance indicate that reforms are enabling Portugal to engineer an export-led recovery.
Portugal had already tested appetites for crucially important 10-year debt in May of 2013.
The renewed willingness of international investors, principally investment funds of various types to lend money to Portugal at interest rates which the country can afford is evidence that structural reforms put in place under the conditions of the bailout have won back confidence by lenders that they will be repaid.
“It is a very beautiful order book,” said the source.
“Portugal is in the process of showing that it can refinance itself on the markets without any difficulty,” added the source.
Last month Portugal enjoyed attracted demand for an issue of 5-year bonds, raising 3.25 billion euros at a lower rate of 4.657 percent. It is usual for borrowing rates to rise with the length of a loan, since risks rise with time.
The country aimed Tuesday to seize on improving market sentiment which has seen the rate of return on its 10-year bonds fall below five percent on the secondary market, from above six percent at the beginning of the year.
During its previous auction of 10-year bonds in May 2013, Portugal raised 3.0 billion euros at 5.669 percent with demand at over 10 billion euros.
The two bond issues, plus a bond swap carried out in December, mean that Portugal has nearly completed the amount of borrowing it needs for this year.
Portugal has not made a final decision as to whether or not it will seek a precautionary arrangement from the EU’s ESM bailout fund when the current bailout ends.
Such a precautionary arrangement would allow the European Central Bank to step in and buy Portugese bonds in case of a deterioration on the debt market, but on a conditional basis.
The Portuguese economy emerged from recession last year and unemployment has begun to fall from record levels as Portugal’s government has worked to squeeze down the country’s public deficit.
“The country has made lots of efforts which were welcomed by investors,” the banking source said.