Portugal bond sale is not a magic fix

Portugal
has raised $1.62 billion in an auction of four and 10-year bonds.

The
yield, or the interest rate Portugal must pay to borrow funds, on the 10-year
bond was an average 6.719 per cent.

Markets
had been watching closely to see how easily – or not – the debt-hit nation
could raise funds.

Yields
had hit a recent fresh high on its 10-year bonds of 7.3 per cent, before
falling to 6.77 per cent before the auction.

The
sale was seen as a measure of Lisbon’s ability to raise funds on the financial
markets after its debt and deficit problems raised the amount it had to pay to
borrow cash.

“But
even with this auction, most now consider it a question of when, not if, Lisbon
will join the list of eurozone governments turning to Europe and the IMF for
emergency support,” said BBC economics editor Stephanie Flanders.

“European
policy makers – and investors – worry about a Portuguese bail-out, not because
of any inherent concern for that country, but for what it symbolises – and for
what might happen next.”

Bond
buying by the European Central Bank (ECB) had helped keep the yield below 7 per
cent.

There
has been speculation Portugal could join Greece and the Irish Republic in
needing an international bail-out, something it has denied.

And
the European Commission has said there are no discussions under way on an
EU-International Monetary Fund bail-out of Portugal.

However,
some analysts still believe the country will need to seek funding help.

“Our
country analysts still forecast that Portugal will be required to receive funds
from the emergency credit facility,” said Kevin Dunning, economist at the
Economist Intelligence Unit.

“And
there is a high risk that if the interest charged on those funds is as high as
for Ireland; this will slow Portugal’s efforts to reduce its budget
deficit.”

Analysts
believe that while Europe could support Portugal, a bail-out of Spain would
stretch the existing bail-out fund.

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