Portugal Borrowing Costs, Demand Rise at Bill Auction on Bailout Concern

Portugal’s borrowing costs increased at an auction of 500 million euros ($655 million) of 12-month bills today amid mounting concern the nation may follow Ireland in asking for a bailout.

The securities, due Nov. 18, were issued today at an average yield of 5.281 percent, the country’s debt management agency said. That compares with an average yield of 4.813 percent at a previous sale of 12-month bills on Nov. 17. The auction attracted bids for 2.5 times the amount offered, compared with a bid-to-cover ratio of 1.8 in November. The agency had set an indicative amount of 500 million euros for the auction.

“Yields are at levels that the market is viewing as unsustainable,” said David Schnautz, a fixed-income strategist at Commerzbank AG in a telephone interview today. “This should in the end increase the pressure for Portugal to go for a bailout.”

Standard & Poor’s warned yesterday it may cut Portugal’s credit rating on concern the country may have to seek a bailout as the contagion from Europe’s sovereign debt crisis spreads through the region.

Portugal has all the conditions to continue to finance itself in the market, Prime Minister Jose Socrates said Nov. 26. Portugal has completed this year’s bond sales and doesn’t face a redemption until April.

The spread on Portugal’s 10-year bonds over German bunds was at 405 basis points today, after hitting a euro-era record of 484 basis points on Nov. 11.

Budget Gap

Portugal plans to cut state workers’ wages and raise taxes to convince investors it can narrow the euro region’s fourth- biggest budget gap after Greece’s debt crisis led to a surge in borrowing costs for high-deficit nations. Ireland on Nov. 21 became the second euro country after Greece to seek a bailout.

The planned spending cuts for next year are set to be the biggest since at least 1978, according to EU statistics office Eurostat. The austerity measures may hurt Portugal’s economic growth, which has averaged less than 1 percent a year in the past decade.

The government is counting on exports such as paper and wood products to support expansion. The budget forecasts GDP growth of 0.2 percent in 2011, slower than this year’s estimated 1.3 percent pace.

To contact the reporters on this story: Anabela Reis in Lisbon at areis1@bloomberg.net. Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net

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