Portugal faces crunch test as it tries to raise funds

Lisbon: Portugal faces a crunch test this week as the debt-stricken Eurozone country tries to raise fresh funds from investors who want ever higher returns, pushing it to the point where it may need a bailout.

The government insists that all is well, that its austerity measures will restore the public finances, but analysts believe it is only a matter of time before Portugal, after Greece and Ireland, will have to be rescued.

On Friday, the yield or rate of return paid to investors in Portuguese benchmark 10-year bonds jumped to 7.193 per cent, the highest level since Lisbon joined the Eurozone and up from 6.957 per cent on Thursday.

Interest payments at these levels only compound the government's problems to get its debt and deficit back under control, and approach levels that could prove unsustainable over the longer term.

Greece in May and then Ireland in November ran into similar problems and eventually had to call in the European Union and International Monetary Fund to rescue them from default and the whole euro project from collapse.

"Nobody believes that Portugal can get out of this on its own," Thomas Mayer of Deutsche Bank said Friday.

High price

"At this stage, it is no longer a question of whether, after Greece and Ireland, Portugal will get help, but when it will," said Filipe Silva, bond strategist at Carregosa bank.

On Wednesday, the government is hoping to raise up to €1.25 billion (Dh6 billion) through a sale of 3- and 9-year bonds but it could have to pay a high price to get the money. Last Tuesday, it raised €500 million but had to offer record rates — 3.686 per cent on the 6-month treasury bills, up from 2.045 per cent at a previous auction and compared with just 0.59 per cent a year earlier.

"We are in the same [situation] as at the end of 2010 — the problem for these countries remains their sovereign debt," bond strategist at BNP Paribas bank Patrick Jacq said, referring to Portugal and Spain.

"These countries have weak growth and weak inflation. Add to that high bond yields and the cocktail is explosive," Jacq said.

The government said Thursday it had met its 2010 budget deficit target of 7.3 per cent of Gross Domestic Product, down from 9.3 per cent in 2009, and was on track to fully implement tough spending cuts and tax hikes.

The public deficit is set at 4.6 per cent for this year, still well above the EU 3.0-per cent limit, while total accumulated national debt stood €143 billion for 2010, or 83.3 per cent of GDP — above the EU limit of 60 per cent. Prime Minister Jose Socrates insisted on Friday that Portugal was moving in the right direction. "Fiscal receipts [last year] were above target and spending was below target and the budget deficit will be what the government said it would be — 7.3 per cent," he said.

Real question

"That is the best news so that the international financial markets reinforce their confidence in Portugal and that is then reflected in the rates of interest we pay on our borrowing," the prime minister told parliament.

For analysts, the truth of that statement will be tested at Wednesday's bond sale.

"There will be demand for the bonds but at what price is the real question," Rene Defossez of French investment bank Natixis said of the offers due from Portugal, as well as Spain and Italy next week.

"If the rates are very high again, that will become ver-y alarming," he said.