Economic bailout fears send Portuguese bond rates soaring

Portugal, battered by escalating market fears of a bailout of its economy, was forced to pay sharply higher interest rates to raise more than €1 billion in a sale of short-term bonds yesterday.

The treasury sold €1.005 billion of six- and 12-month bonds at auction, slightly above the top end of its targeted range, the government debt agency IGCP said.

But the average yield, or rate of return earned by investors, leapt to 5.902 per cent for the 12-month bills from 4.331 per cent at the last such auction on March 16.

For the six-month bonds, the rate soared to 5.11 per cent from 2.984 per cent on March 2.

Demand was strong for both bills.

“Today’s (auction) is clearly a test as Portuguese banks are more and more worried by their current overall exposure to Portuguese debt, which keeps deteriorating,” said Jean Francois Robin, a strategist at Natixis in Paris.

The markets increasingly believe that Lisbon will be forced to seek an international bailout, like fellow eurozone strugglers Greece and Ireland last year. They are demanding ever higher rates of return to provide fresh funds to cover its debt.

Moody’s Investors Service on Tuesday downgraded Portugal’s ratings by a notch from A3 to Baa1 and warned that it expected the country to have to seek outside help to resolve its debt problems.