Portugal successfully raised 500 million euros ($660 million) in a Treasury bill sale Wednesday but had to pay a sharply higher interest rate to get the support of investors, still worried by the level of the country's debts.
The average interest rate of 3.7 percent was close to twice 2 percent rate Portugal paid on similar bonds in September — a reminder that Europe's debt crisis isn't over, as investors continue to demand a higher premium to back more indebted countries.
"This is a major hike in cost — 80 percent," said David Buik, markets analyst at BGC Partners.
The increase was expected, given Portugal's higher borrowing costs in the markets during the autumn when Ireland became the second eurozone country after Greece to be bailed out by its partners in the EU and the International Monetary Fund.
Despite the higher yield Portugal had to pay, there was a sense of relief that the auction went smoothly, as evident in the level of bids from investors. Demand was strong at over 1.3 billion euros.
"The sale went well, considering some of the more pessimistic pedictions," Banco Carregosa debt manager Filipe Silva wrote in an analysis. "Though it was no setback, the situation isn't any brighter. Portugal's financing ist still at a very costly level."
A failure to raise such a small sum could well have prompted another bout of jitters about whether Portugal will end up joining Athens and Dublin in the bailout club.
Nevertheless, higher borrowing costs may well become unsustainable in one of the eurozone's frailest economies.
Portugal's worsening debt problem could also have a knock-on effect for other troubled countries such as much larger Spain and undermine broader market confidence in the euro area.
Analysts say Portugal's anemic growth and rising debt may force it to seek a bailout, though the government insists it doesn't need help.
Portugal needs to raise up to 20 billion euros on financial markets this year. Increasingly higher borrowing costs are likely to make investors more nervous about its ability to meet its debt obligations.
Last month, Fitch Ratings agency downgraded Portugal's credit rating by one notch to A-plus from AA-minus and warned that further downgrades may be in the offing.
Moody's Investor Services has warned it may cut its A1 rating on Portugal, while Standard & Poor's Ratings Services is also considering a downgrade.
Portugal's minority government has introduced an austerity plan including tax hikes, pay cuts and curbs on expenditure in its effort to slash the country's debt load.
The budget deficit stood at 9.6 percent in 2009 but is expected to have fallen to 7.3 percent last year. The government is aiming for 4.6 percent this year.
However, analysts forecast the austerity measures will hurt growth. The European Commission predicts the economy will contract 1 percent this year.
The yield on Portuguese 10-year bonds rose slightly Wednesday to 6.4 percent. By comparison, benchmark German bonds were slightly lower at 2.9 percent.
The difference was evident in what Germany had to pay to get its own 3.916 billlion euro auction through Wednesday.
As in the Portuguse auction, demand was buoyant with bids 1.6 times more than what was being offered.
Unlike the Portuguese auction, German isn't under any debt threat so it doesn't have to pay the exorbitant rates Lisbon has to offer. The yield in the German auction was 2.87 percent, up from 2.59 percent, when it last offered 10-year bunds — the increase was broadly in line with moves in the markets.
Germany's debt management officials are likely to breathe a sigh of relief though as a number of auctions at the end of 2010 failed to generate the requisite support, partly because of the low returns on offer and partly on concerns that Germany is getting dragged into Europe's debt crisis by having to prop up the eurozone's ailing economies.
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