Portugal moves towards bailout exit with new 10-year bond

LISBON Tue May 7, 2013 11:28pm IST

People pass by a political poster reading, ''Passos/Toika out. Elections now. Turn the crisis around. Cut the debt and not the salaries'', on a street in Lisbon May 7, 2013. REUTERS/Jose Manuel Ribeiro

People pass by a political poster reading, ''Passos/Toika out. Elections now. Turn the crisis around. Cut the debt and not the salaries'', on a street in Lisbon May 7, 2013.

Credit: Reuters/Jose Manuel Ribeiro

LISBON (Reuters) - Portugal sold 3 billion eurosin its first 10-year bond in more than two years on Tuesday, with keen, mostly foreign investors putting the country on course to exit its bailout on time and qualify for an ECB debt support programme.

The yield of 5.65 percent, although still high compared to fellow bailed-out state Ireland's 4.15 percent bond pricing in March, was half that seen in the secondary market a year ago and below the so-called danger zone that starts at 6 percent.

Demand surpassed 10 billion euros, the finance ministry said, adding that foreign investors accounted for 86 percent of the placement, led by British investors who took up 27 percent.

"The operation was a great success ... We've completed the yield curve," Finance Minister Vitor Gaspar said in Brussels.

In January, Lisbon reopened a five-year bond and raised 2.5 billion euros in its first long-term debt issue since it had to resort to the 78 billion euro EU/IMF aid programme in May 2011.

Joao Moreira Rato, head of the government's IGCP debt agency told Reuters Lisbon, "will be in the market more regularly from now on, possibly reopening existing bonds like in January or holding auctions.

"We will act more like we used to act before the bailout."

Helped by the bond issue, shares in Portuguese banks rose on Tuesday, lifting Lisbon's PSI20 .PSI20 index almost 1 percent.

"What's nice to see is that this (yield) level, as well as Portugal's secondary market yields, are all below the 6 percent danger zone," said David Schnautz, debt strategist at Commerzbank in New York. The yield is just tad more than 5.51 percent where a shorter current benchmark bond trades.

Concerns over Portugal's deep recession and domestic opposition to the austerity programme mandated under the bailout had pushed the yield above 6 percent last month - still just a fraction of the 17 percent it hit in early 2012.

Schnautz said the issue and strong demand "support Portugal's comeback story in the market".

Analysts say one reopening for each of the two bonds sold since the start of the year should make Portugal eligible for the European Central Bank's bond-buying scheme, intended to support the debt programmes of weaker euro zone nations with full access to bond markets.

That should also put it on track to exit its bailout on schedule by mid-2014.

Portugal's debt yields are near their lowest levels since 2010 thanks to a recent easing of investor concerns about the euro zone debt crisis. When it last sold 10-year bonds in January 2011, Portugal paid 6.716 percent.

Investors chasing higher returns last week enabled Slovenia, which is seeking to avoid becoming the fifth euro zone state to take a sovereign bailout, to sell a 10-year bond at 6 percent.


The decision by Portugal to go ahead with a 10-year bond also signals the government expects its international lenders to agree new spending cuts announced after the constitutional court last month threw out 1.3 billion euros of this year's cuts.

The new savings are designed to compensate for the rejected measures along with wider deficit reduction steps until 2015 worth 4.8 billion euros.

Representatives of the lenders arrived in Lisbon on Tuesday to review the plans.

By getting its deficit-reduction plan back on track, Portugal also seeks to get a full EU approval for an extension of its rescue loan maturities later this month.

"There have been strong signals regarding the extension of maturities, which allows a 10-year bond to fit neatly into Portugal's redemption profile. I guess the new issue would not have happened but for the discussion on the extensions with the lenders," said Michael Michaelides, debt strategist at RBS. (Reporting By Andrei Khalip; Editing by John Stonestreet, Ron Askew)

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