Business

Portugal bond auction raises 1.25bn euros

A Portuguese financial broker in Lisbon talks on the phone
Image caption The sale was an important one for Portugal

Portugal has raised 1.249bn euros (£1.04bn; $1.62bn) 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%.

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%, before falling to 6.77% on Wednesday morning before the auction.

'Bail-out worry'

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."

'ECB active'

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

"Probably the most important thing for the 10-year yield is that the 7% level was not breached," said Michael Leister, of West LB in Duesseldorf.

"The ECB have been very active in past days stabilising the market and sentiment.

"It remains to be seen over the coming trading session whether this will be a turnabout for Portugal and whether recent spread tightening can be sustained."

The four-year bond yield was 5.396%.

Bail-out?

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

The country's borrowing costs have surged as investors worried over its financial health.

Lisbon has argued its situation is different from Greece and the Irish Republic - both of which have agreed to bail-outs from the European Union and International Monetary Fund.

It says that its deficit and debt are lower than those nations, that it has not suffered a bubble in property prices and that its banks are sound.

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."

Spanish auction

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

Greece was the first eurozone nation to take a bail-out when a three-year 110bn-euro deal was agreed.

The Irish Republic's 85bn-euro bail-out package was agreed last month.

A debt sale due on Thursday by Spain will also be closely watched by investors.

Funding call

European Union leaders also renewed their call on Wednesday for eurozone member states to put more money into the bail-out fund for countries that run into financial trouble.

European Commission President Jose Manuel Barroso said the European Financial Stability Facility needed to be extended from its current 440bn euro ($571bn; £366bn) level.

He said the increase was required to reassure markets that the stability of the eurozone was "not in question".

However, Germany - the largest contributor to the fund - has so far ruled out increasing its size.

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