April 1, 2011

Portugal Bond Auction Buys Time

Demand strong, but yields up again

Portugal held a snap auction of bonds on Friday to help it fund its second quarter. But while demand was strong, yields continued to rise, presenting a bleak outlook as Lisbon attempts to avoid the need to seek a bailout package.

Reuters reported that the country missed its 2010 budget deficit target, according to data released Thursday, and the news had sent yields soaring to a new euro-lifetime high. The National Statistics Institute said that the budget deficit had hit 8.6% of GDP, which is substantially above the 7.3% target that had been agreed upon with Brussels. Nonetheless, on Friday Lisbon was able to place a greater-than-expected 1.6 billion euros’ worth ($2.265 billion) of one-year bonds to investors that were reported to include not just locals, but also Brazilian and Asian parties.

Portugal’s debt agency IGCP had said on Thursday that it planned to auction as much as 7 billion in treasury bills during Q2; the country must redeem 4.2 billion euros in bonds in April and 4.9 billion euros in bonds in June. Economists believe that Lisbon has raised enough funding to cover the first redemption, but say that the second may be problematic. As bond yields keep rising, this points the way toward continued financial difficulties for the country, which still has not resorted to asking for a bailout.

In the wake of the resignation of Prime Minister Jose Socrates after the unsuccessful vote on additional austerity measures, the country is being run by an interim caretaker government. That government, according to Finance Minister Fernando Teixeira dos Santos, has neither the powers nor the legitimacy to request and negotiate a bailout. The political crisis engendered by the vote and Socrates’ resignation led to downgrades by ratings agencies, which in turn have led to even higher yields on bonds.

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