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Portugal wins reprieve on bond market

Portugal won a reprieve on the bond market on Thursday where its 10-year borrowing rate eased sharply after peaking a day earlier in response to a political crisis.

The cost of borrowing fell sharply in initial bond trading as the coalition government in Lisbon tries to overcome the crisis sparked by the resignation of two ministers.

Portugal’s 10-year borrowing rate fell back to 7.216 percent after having surged on Wednesday from slightly less than 7.0 percent to 8.106 percent briefly during trading. That was the first time the yield had been above 8.0 percent since 2012.

Portugal was rescued from the threat of bankruptcy two years ago with loans of 78 billion euros ($101 billion) from the International Monetary Fund and European Union, but on condition it applies deep budget and economic reforms.

These have plunged the country into recession, and the finance minister and foreign minister have resigned this week over tensions arising from the austerity programme.

IMF and EU auditors are due to arrive on July 15 for a regular review of progress on reforms, on which depends the release of the next slice of rescue funding.

Portugal does not need to borrow on the bond market until next year.

But the sudden fall of its bond prices and consequent rise of the indicated interest rate on Wednesday was a warning signal of concern that the country could be heading into dangerous waters if the political crisis is not resolved quickly.

At Berenberg Bank in London, chief economist Holger Schmieding commented: “Breaking up the Portuguese coalition before positive results of the harsh austerity could improve the chances of the two governing parties to win new elections always looked irrational.”

“Maybe this has sunk in. Maybe the sharp market reaction yesterday also made some policy makers think again.”

Schmieding said that in view of talks due today between political leaders in Lisbon “the coalition, which had looked doomed after the resignation of (Foreign Minister) Portas on Tuesday, now has a chance to survive.”

Borrowing rates for Spain and Italy, which had been dragged up by the Portuguese crisis on Wednesday, also eased.

The 10-year borrowing rate for Spain fell to 4.735 percent from 4.768 percent, and for Italy to 4.472 percent from 4.500 percent.

Investors were waiting to hear what the head of the European Central Bank Mario Draghi had to say about the situation at a press conference later on Thursday after the bank meets to discuss interest rate policy.

Analysts expected that the ECB would not announce new measures and would not react specifically to the crisis in Portugal.