Portugal passed a key credibility test and gave the eurozone a respite yesterday, raising €1.25 billion and attracting strong interest for long-term debt and at reduced rates.
Analysts said the outcome was at least a success for now, taking the immediate pressure off Lisbon to seek a bailout but a lot of work remained to be done if it is to keep the market wolves from the door.
Reported European Central Bank buying of Portuguese bonds before the sale, together with strong Chinese and Japanese expressions of support for the eurozone, have been enough to avoid the worst, they added.
The Portuguese debt agency said the yield or the rate of return for investors in the bonds maturing in June 2020 came in at 6.716 per cent, down from 6.806 per cent at a similar sale in November.
However, on the bonds maturing October 2014 which were also offered, the yield jumped to 5.396 per cent, up sharply from the 4.041 per cent paid in November, suggesting greater concerns remain in the short-term.
Demand was 3.2 times the amount on offer for the June 2020 bonds and 2.6 times for the October 2014 bonds.
The bond sale was a key test of Lisbon’s ability to continue to raise funds on the financial markets after its debt and deficit problems saw the markets demanding every higher rates for fresh funding.
Many analysts had concluded that whatever the outcome yesterday it was only a matter of time before Lisbon sought help, in the same way that Greece in May and Ireland in November eventually caved in despite their denials of need.
On the markets, the pressure on Portugal eased slightly after the auction. In early afternoon trading, the yield on the benchmark 10-year Portuguese bond was at 6.860 per cent, down from the close Tuesday of 6.900 per cent but up from earlier deals at 6.769 per cent.
In midday London trading, the euro slipped to $1.2966 after breaching $1.30 on news of record annual economic growth for Germany. It was at $1.2974 in New York late on Tuesday.
European stock markets were higher, with Lisbon jumping 1.94 per cent and Madrid soaring 3.55 per cent in a relief rally.
The bond sale “proved that for the moment, Portugal can still access the financial markets,” analysts at ING said in a note.
Others remained unconvinced.
“With the resurgence of sovereign debt fear seemingly timed to play out on Portugal now, few probably care whether the government believes that it needs bailout help or not,” said BGC Partners analyst Howard Wheeldon.
Yesterday’s bond sale was Portugal’s first since Ireland was forced to seek an EU-IMF bailout in November and came amid increasing speculation that problems in Lisbon could end up snagging Spain and perhaps others. The stakes accordingly were very high, a bailout for Spain, the fourth largest economy in the eurozone, would have strained the bloc to breaking point and seemingly prompted ECB intervention.
Spain itself goes to the markets today, seeking to raise €2 to €3 billion.