By Joao Lima
(Updates yield in seventh paragraph and adds bond price in 17th. For more on the euro crisis, click EXT4.)
Jan. 17 (Bloomberg) — Portugal will test the markets’ appetite for debt tomorrow when the country auctions the longest maturity bills since it sought rescue funds last year from the European Union and International Monetary Fund.
Investors will be asked to bid for 11-month Portuguese bills as 10-year yields hover at record highs. The rise in rates followed the Jan. 13 decision by Standard & Poor’s to cut Portugal’s credit rating to non-investment grade, or junk Vest Dresses, meaning the nation’s debt can no longer be held by some index- tracking funds.
The country sold 12-month debt on April 6, 2011, at an average yield of 5.90 percent in what was the last sale before Portugal followed Greece and Ireland in requesting a bailout from the EU and IMF. Portugal is receiving 78 billion euros ($100 billion) of aid and aims to sell securities maturing in more than a year at the end of 2013.
“At least in 2012, Portugal will not default,” said Filipe Silva, who manages 60 million euros of debt securities at Banco Carregosa SA in Oporto, northern Portugal. “There is some optimism.”
IGCP, the nation’s debt agency, announced plans Jan. 12 to offer as much as 2.5 billion euros of three-, six- and 11-month bills tomorrow. Portugal’s borrowing costs fell at a Jan. 4 auction of 1 billion euros of three-month bills, with the securities issued at an average yield of 4.346 percent, down from 4.873 percent at the previous auction on Dec. 7. The sale attracted bids for 2.4 times the amount offered, compared with a bid-to-cover ratio of 2 in December.
Initial Rebound
Portuguese bonds rose this year before the Jan. 13 downgrade, returning 5.2 percent with reinvested interest, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show. The securities dropped 24 percent last year, the most since at least 1994.
Ten-year Portuguese yields rose as much as 2.03 percentage points yesterday to an all-time high 14.48 percent, widening the spread over benchmark German bunds to a record 12.70 percentage points. The yield slipped to 14.31 percent today and the gap narrowed to 12.51 percentage points.
French borrowing costs fell yesterday at the country’s first bill sale since S&P stripped the nation of its top credit rating. The rate on 10-year French debt declined 4 basis points to 3.03 percent as investors shrugged off the downgrade. JPMorgan Chase & Co. research shows that 10-year yields for the nine sovereigns that lost their AAA status between 1998 and 2011 rose by an average 2 basis points in the next week.
Index Trackers
Investors ignored S&P in August when it cut the U.S. to AA+, with the yield on the country’s benchmark government bond falling to a record low of 1.6714 percent seven weeks later.
For Portugal, “I don’t see any problem with completing the sale of this larger maturity,” said Artis Frankovics, an interest rate analyst at Nomura International Plc in London. “The problem with Portugal is that following Friday’s downgrade, its rating is now below investment grade from all major credit rating agencies, and thus its bonds don’t meet the eligibility criteria for some of the index-tracking funds” that typically hold the securities, he said.
Portugal’s central government needs to borrow about 17.4 billion euros in 2012, the country’s debt agency said on Dec. 29. It has no bond redemptions until June 2012, when it faces a 10 billion-euro maturity.
Portuguese residents hold almost 40 percent of the country’s government debt, the IMF said in a Dec. 20 report, adding that foreign investors are willing to purchase the bonds “at reasonably higher rates.”
Negative Outlook
S&P lowered Portugal’s credit rating last week two levels to BB with a negative outlook, indicating a one-in-three chance of another downgrade within 12 months. The country’s rating was cut to below investment grade in July by Moody’s Investors Service as the long-term government bond ratings were lowered to Ba2 from Baa1, while Fitch on Nov. 24 reduced the rating one level to BB+ from BBB-.
The downgrade reflects “deepening political, financial, and monetary problems within the euro zone Vest Dresses, with which Portugal is closely integrated,” S&P said in its Jan. 13 statement. The decision also stems from “sustained external financing pressures on Portugal’s private sector, and what these may imply for growth performance and, in turn, public finances,” the company said.
IMF’s View
The IMF said Dec. 20 that the European debt crisis is a “serious” risk to Portugal as the nation seeks to meet the targets of its financial aid program and return to bond markets in two years. “Portugal’s program has remained broadly on track, but rising stress in Europe is a serious risk,” the Washington- based lender said.
Greece and creditors are discussing a reduction in the face value of its debt as the country tries to avoid default. S&P estimated holders of Portuguese government debt could achieve an average recovery of 30 percent to 50 percent in the event of a default or debt restructuring.
Portugal aims to trim its budget deficit to 4.5 percent of gross domestic product in 2012 from 9.8 percent in 2010, and to the EU ceiling of 3 percent in 2013.
The country’s economic growth has averaged less than 1 percent a year for the past decade, placing it among Europe’s weakest performers. The economy will shrink 3 percent in 2012 and may then expand 1.1 percent in 2013, the European Commission forecast on Nov. 10. The euro area is forecast to expand 0.5 percent in 2012.
–Editors: Matthew Brown, Tim Quinson
To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net.
To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net
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