Business | Economy

Portugal borrows €1b to survive until bailout

Lack of faith means high returns for lending

  • AP
  • Published: 00:00 May 19, 2011
  • Gulf News

Lisbon: Cash-strapped Portugal managed to borrow €1 billion (Dh5.2 billion) on financial markets Wednesday, giving it some breathing space while it awaits a promised bailout.

The sale of eight-week Treasury bills showed why Portugal needed to ask for help as the country had to pay jittery investors an interest rate of 4.657 per cent for the short-term loan.

A lack of faith in Portugal's fiscal stability and economic prospects has led investors to demand high returns for lending it money.

Tap debt markets

The €78 billion bailout from the International Monetary Fund and other European countries aims to spare Portugal from having to tap international debt markets over roughly the next two years.

That money, which will come with an interest rate of around 5.7 per cent, is expected to start arriving later this month. The rate on Portugal's ten-year bonds stands at around 9 per cent.

European authorities refused to provide a bridging loan before a full bailout, forcing Portugal to turn to markets for its immediate financing needs. It paid a rate of 4.652 per cent in an auction of 12-week T-bills earlier this month.

The government debt agency said there was demand for double the amount on offer yesterday, easing fears the country could be shut out of markets.

The European Commission predicts Portugal's debt will reach 101.7 per cent of gross domestic product this year and increase to 107.4 per cent next year. On top of that, the Portuguese economy is expected to contract 4 per cent over the next two years, denying it revenue to settle its debts.

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