Portugal May Be Frozen Out in Issuance ‘Avalanche’: Euro Credit

Portugal's Finance Minister Fernando Teixeira
Portugal's Finance Minister Fernando Teixeira. Photographer: Jerome Favre/Bloomberg

Portugal risks being frozen out of the bond markets next year amid a wave of auctions from higher-rated governments and agencies that threaten to force the nation into seeking a bailout to pay its debts.

“It has become the market consensus that Portugal’s ability to fund on a standalone basis is fairly constrained,” said Jamie Stuttard, head of European and U.K. fixed income at London-based Schroders Plc, which has $286 billion under management. “People have investment alternatives.”

Portugal has 11 billion euros of debt payments to make in the first quarter, according to data compiled by Bloomberg. Total euro government issues may reach 863 billion euros ($1.1 trillion) next year, said Morgan Stanley strategist Elaine Lin in London. While that’s down from 925 billion euros in 2010, it is “elevated compared to historical levels,” and higher than the average from 2000 to 2008, she said.

And while Greece and Ireland won’t borrow in 2011 after seeking bailouts, Klaus Regling, who manages the 440 billion-euro part of the AAA rated European Financial Stability Facility to finance that aid, plans his first sale of 5 billion euros of securities in the second half of January.

Analysts at UniCredit SpA in Milan and Paris-based Societe Generale SA are penciling in zero supply from Portugal next year, predicting a rescue will be needed to cap borrowing costs.

“The pressure on peripheral spreads should be mounting again approaching next year’s supply avalanche,” Norbert Aul, a fixed-income strategist at Royal Bank of Canada Europe Ltd. in London, wrote in a Dec. 8 investor report.

Portuguese 10-year bonds fell today, heading for the eighth weekly decline in nine. Spanish bonds were heading for second week of losses.

Refinancing Needs

Portugal’s refinancing needs, including bills, climb to 12 billion euros after interest in the second quarter, Bloomberg data show. Spain has about 32 billion euros of obligations in the first quarter, and 40 billion euros in the second.

“We see a risk that Portugal’s access to funding might dry up to such an extent that Portugal too might not be able to avoid going to the European Financial Stability Facility eventually,” Laurence Mutkin, Morgan Stanley’s head of European fixed-income strategy, said in a Dec. 10 research note. The New York-based bank estimates that Portugal needs to sell 17 billion euros of government bonds next year.

China Rescue?

Portugal is trying to diversify the investor base that holds the country’s debt, said Alberto Soares, president of Portugal’s government debt agency, in a Nov. 8 interview.

“We have visited Asian investors, including China,” he said. “We maintain our commitment to source our funding through the markets.”

Portugal’s borrowing costs jumped on Dec. 15 when the nation sold three-month bills at an average yield of 3.403 percent, compared with 1.818 percent at a Nov. 3 sale of similar-maturity debt. The auction attracted bids for 1.9 times the amount offered, down from 2.2 a month earlier.

Spain sold 2.4 billion euros of bonds yesterday, less than its maximum target. Its 10-year funding cost jumped to 5.446 percent from 4.615 percent last month, while its 15-year debt cost was 5.953 percent, compared with 4.541 percent in October.

Standard & Poor’s said Nov. 30 it may cut Portugal’s A-credit rating. Moody’s Investors Service said this week it may cut Spain’s rating from Aa1, because its “substantial funding requirements, not only for the sovereign but also for the regional governments and the banks, make the country susceptible to further episodes of funding stress.”

Yield Premiums

The extra yield investors demand to hold Portuguese government bonds instead of benchmark German securities widened to 343 basis points today. It reached a euro-era record of 484 basis points on Nov. 11. The yield premium for Irish bonds was at 538 basis points and investors demand a premium of 250 basis points to hold Spanish 10-year debt instead of bunds.

The cost of insuring Portuguese debt against default reached 453 basis points yesterday, up from 439 the day before, according to CMA prices.

“When you sell bonds, that’s when you’re properly going to test the market’s appetite to buy your debt,” said Paul Lambert, head of the global macro team at Polar Capital Holdings Plc in London. “These bond markets won’t fail because people are shorting them, they’ll fail because people won’t want to buy the bonds.”

Societe Generale analysts said in a research report this month that their predicted total bond sales for 2011 of 823 billion euros include 14 billion euros from the EFSF, and nothing from Portugal.

Locked Out

UniCredit also said Portugal may be locked out of the market. “It will be challenging for the European Monetary Union countries to finance themselves in the primary market,” strategists Luca Cazzulani and Chiara Cremonesi said in a Dec. 7 report. “The good news in this respect is that Greece, Ireland and Portugal should not have to issue anything and this may benefit -- at least moderately -- other peripheral countries.”

Euro area nations may seek to fulfill 30 percent of their funding needs in the first quarter of the year, in line with customary so-called front-loading of debt sales, UniCredit said.

Portugal’s debt amounts to 76 percent of gross domestic product, compared with 53 percent in Spain, 66 percent in Ireland and 116 percent in Italy last year. Spending by the Portuguese government, which lacks a parliamentary majority, continued to climb in the first 10 months of 2010, Finance Minister Fernando Teixeira dos Santos said on Nov. 17.

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