February 29, 2024

Portugal Stages Surprise Bond Auction; Ireland Is Hit With New Downgrade

The government sold 1.65 billion euros ($2.3 billion) of short-term government debt, more than it had planned, after abruptly announcing the sale Thursday night. Lisbon said it was meeting “specific demand” for the debt without giving more details. The yield was 5.79 percent, 2.5 percentage points more than it paid at auctions of similar bonds last year.

Yet shortly after the auction was completed, Fitch, the ratings agency, cut Portugal’s credit rating by three notches, saying it was concerned that the country would not receive timely external support before the elections on June 5.

Some investors said that demand for the bonds could have come from China, which previously said it would support European economies troubled by large debt burdens, and Brazil, whose president was recently cited in a newspaper report as saying the country might buy Portuguese debt.

Portugal needs 9 billion euros in the short term to pay for two bond redemptions in April and June if it wants to avoid a bailout by the European Union and the International Monetary Fund.

Prime Minister José Sócrates resigned on March 23 after failing to push his latest austerity plan through Parliament. President Aníbal Cavaco Silva on Thursday set June 5 as the date for new elections.

The bond sale on Friday, which raised more than the 1.5 billion euros planned, bought Portugal some breathing room to sort out its finances and avoid becoming the third country in the euro zone to seek a bailout, after Greece and Ireland.

“It might be that what they’re trying to do is issue just enough short-term debt to get through to the elections and then the next government can ask for help,” said Laurent Fransolet, head of European fixed-income strategy at Barclays Capital in London.

Mr. Fransolet also said it was not surprising that Portugal preferred to raise the needed funds on the market rather than through a bailout. “There are other costs associated with going to the E.U. and the I.M.F., including political costs,” he said.

Carlos Costa Pina, the Portuguese secretary of state for Treasury and finance, said recently that Portugal would be able to meet its debt commitments for this year, including the redemptions of long-term debt in April and June.

Fears that Europe’s debt crisis was worsening again grew Thursday when Portugal disclosed a budget deficit that was higher than expected and it was revealed that four of Ireland’s most prominent financial institutions required a further capital injection of 24 billion euros to cover bad loans.

Ireland yielded to the European Central Bank on Friday when it agreed to protect bondholders even as the costs for bailing out its banks rose. The country had disagreed with the central bank on the issue, arguing that senior bond holders in the banks would have to share the losses to reduce the costs of the bailout.

Standard Poor’s, the debt rating agency, cut Ireland’s sovereign debt rating one notch to BBB+ from A but revised its outlook to stable. The cut left Ireland with a low investment grade.

Fitch on Friday cut Portugal’s long-term foreign and local currency ratings to BBB–, one notch above junk level, from A–.

Portugal had its sovereign credit rating lowered to BBB– by Standard Poor’s on Tuesday on concerns that the country might have to default on some of its debt. Officials in Lisbon said Thursday that the country’s budget deficit last year was 8.6 percent of its gross domestic product, well above the goal of 7.3 percent.

The government of Mr. Sócrates had already started to increase taxes and cut spending to try to reduce the budget deficit to 4.6 percent of G.D.P. this year. Portugal had a record deficit of 9.3 percent in 2009.

Article source: http://feeds.nytimes.com/click.phdo?i=fd395a3439b2a23e93b90f20584104c7

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