Portuguese yields may be rising to levels that force the nation to follow Greece and Ireland in requesting a bailout from the European Union and the International Monetary Fund to avert default.
The nation plans a 10-year sale tomorrow, the first bond auction by any of the euro region’s most indebted countries this year. Its existing 10-year debt has yielded more than 7 per cent in 10 of the past 62 days, according to Bloomberg data. Greece needed a rescue within 17 days of its 10-year yield breaching 7 per cent on April 6, while Ireland lasted less than a month after it cracked that level in October.
“Even if we see a successful auction, it doesn’t mean anything, because at rates above 7 per cent it’s not sustainable,” said Ioannis Sokos, a strategist at BNP Paribas in London. “It is inevitable that Portugal has to turn to the EU and IMF if they keep borrowing at these levels.”
The cost of insuring European sovereign debt has climbed to a record on concern backstopping the region’s banks will overwhelm government finances. Countries including Spain, Italy, the Netherlands and Germany will hold bond and bill sales worth as much as ¤42 billion ($54 billion) this week. Portugal’s six-month borrowing cost jumped to 3.686 per cent at a bill sale last week, up from 2.045 per cent in September.
Portuguese Prime Minister Jose Socrates said today his government will not ask for aid and that talk of a bailout is only helping “speculators”. He also said last year’s budget deficit will be lower than the government had forecast.
Japan said today it would buy bonds tied to a bailout fund for indebted European nations, echoing pledges by China to help stem the region’s debt crisis.
Investor referendum
“In this environment, each auction by Portugal and Spain is seen by the market as a referendum on its likelihood of continuing without rescue,” said Toby Nangle, who helps oversee $46 billion as director of asset allocation at Baring Asset Management in London. “People aren’t looking for a failed auction; it’s the rate they’re looking at.”
Portugal plans to borrow as much as ¤1.25 billion tomorrow by issuing debt repayable in October 2014 and June 2020, the nation’s debt agency said on January 6. The following day, Spain will auction as much as ¤3 billion of five-year bonds, while Italy will market ¤6 billion of securities maturing in 2026 and 2015.
The Netherlands issued ¤3.5 billion of debt today, with Germany seeking ¤7 billion tomorrow. Greek and Italian borrowing costs rose and demand waned at sales of almost ¤9 billion of bills today.
A bailout for Portugal may oblige Germany to end its objections to expanding the region’s ¤750 billion rescue facility, or to bond issues that are guaranteed by all euro members, according to Christoph Rieger, head of fixed-income strategy at Commerzbank in Frankfurt.
‘Crucial test’
“Portugal will be the crucial test,” Rieger said. “They’ll have to come up with a multiplying of the bailout money or something like a common bond to turn things around.”
Chancellor Angela Merkel’s chief spokesman, Steffen Seibert, declined to repeat German objections to restocking the rescue fund after the Handelsblatt newspaper reported on January 9 that EU leaders may discuss an increase in February. Merkel has up to now opposed expanding government-funded help for debt-plagued euro nations, saying as recently as December 6 that she sees no need for additional aid.
