Portugal’s Borrowing Costs Fall, Demand Rises in Sale

Portugal’s borrowing costs fell and demand rose at the sale of 750 million euros ($1 billion) of 12-month bills, adding to other auctions this week that signal Europe’s high-deficit countries can still finance their debt.

The yield fell to 4.029 percent from 5.281 percent, the highest in more than five years, at a sale of similar maturity securities on Dec. 1, the country’s debt agency said today in Lisbon. Investors bid for 3.1 times the amount of bills offered, more than the 2.5 times in December.

“A decline of 120 basis points is really a relief, but if we look further back, this yield is quite high,” Filipe Silva, who manages 60 million euros including Portuguese bonds at Banco Carregosa in Oporto, Portugal, said in an e-mailed note.

The nation’s borrowing costs surged last month after Ireland followed Greece in accepting a European Union-led bailout and investors shunned the debt of Europe’s other so-called peripheral countries. Prime Minister Jose Socrates said on Jan. 12 that Portugal won’t need help financing debt maturing this year. The country doesn’t face any bond redemptions until April, with repayments that month and in June worth about 9.5 billion euros.

The difference in yield between Portuguese 10-year bonds and German bunds, Europe’s benchmark, reached a euro-era record of 484 basis points on Nov. 11. The spread was at 406 basis points today.

Bond Sale

Portugal also paid lower borrowing costs at an auction of 599 million euros of 10-year bonds on Jan. 12. Today’s sale came one day after Spain and Greece sold more than 6 billion euros of treasury bills.

Portugal’s 21 billion euros in financing needs this year compares with the almost 91 billion euros required by Spain and the 226 billion euros planned by Italy, according to estimates by UniCredit SpA.

Socrates has raised taxes and cut wages to try to convince investors the government can narrow its budget gap after Greece’s near default led investors to shun the debt of Europe’s other high-deficit nations. That effort helped reduce the 2010 deficit to less than the 7.3 percent of gross domestic product forecast, Socrates said on Jan. 11.

The country set a target for a budget deficit of 4.6 percent of GDP in 2011, and aims to reach the European Union limit of 3 percent next year.

The austerity measures are taking a toll on growth. The Bank of Portugal on Jan. 11 said GDP will shrink 1.3 percent in 2011 as consumer demand drops and the government cuts spending.

The European Central Bank’s financing to Portuguese banks rose in December from the previous month, following three straight monthly declines, according to the Bank of Portugal. ECB financing rose to 40.899 billion euros from 37.935 billion euros in November.

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