Portuguese bond sale sees strong demand

[January 12, 2011]  LISBON, Portugal (AP) -- Portugal managed to borrow euro1.25 billion ($1.62 billion) in a bond auction Wednesday which analysts said was encouraging, though bigger improvements will be needed in the future to avoid a bailout.

The auction -- seen as a key test of investors' confidence in Portugal -- drew strong demand, though investors wanted a high return for risking their money on the debt-stressed country.

The government debt agency said it sold euro650 million in 3-year bonds and euro599 million in 9-year bonds.

The average yield on the shorter-term loan was 5.4 percent, up from 4 percent in the last sale, while the yield on longer bonds was 6.7 percent -- slightly down from 6.8 percent at the last similar auction and a comforting sign for the government's efforts to allay market concerns about its fiscal soundness.

High demand for the bonds -- the agency said Portugal could have sold more than double the amount offered -- reassured authorities the country can still finance itself on international markets.

"The auction went well," said Simon Derrick, economist at Bank of New York Mellon.

However, the crucial question for Portugal is how long it will have to pay the high rates, especially as the economy is forecast to slip back into recession this year, keeping pressure on public finances.

"Over the long-term, this situation is unsustainable and is going to require a national or international solution," Filipe Silva, a debt manager at Banco Carregosa, said.

Most analysts predict Portugal, a small country with a frail economy, will be engulfed by Europe's financial crisis as its borrowing costs rise to unsustainable levels and potentialy wreck its chances of economic recovery.

Portugal needs to raise up to euro20 billion on financial markets this year.

The government insists it doesn't need outside help and can restore faith in its fiscal policies with its austerity program of tax hikes and pay cuts.

Finance Minister Fernando Teixeira dos Santos has expressed frustration at what he sees as a lack of help from fellow European nations to keep Portugal from resorting to a rescue. A bailout is a significant blow to a country because the government effectively loses control of its fiscal policies to foreign aid monitors.

The European Union's top monetary official said Wednesday the euro440 billion ($570 billion) bailout fund for debt-ridden countries should be increased and given more powers.

Monetary Affairs Commissioner Olli Rehn said discussions with the 17 eurozone governments on boosting the size of the fund were currently going on "and progress is being made."

Analysts fear that the existing backstop might be too small if a big economy like highly-indebted Spain runs into financial trouble. Both Spain and Italy are due to hold bond auctions Thursday.

Market tensions were eased somewhat this week after Japan, taking advantage of high interest rates and echoing a similar pledge by China, said Tuesday it would help finance European bailout efforts.

China had earlier vowed to help Portugal, as it has supported Greece and Spain, by buying their debt. Though details have not been released, reports suggest China is ready to invest at least euro4 billion.

[Associated Press; By BARRY HATTON]

Gabriele Steinhauser in Brussels and Pan Pylas in London contributed to this report.

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