Thursday, January 13, 2011


Portugal's successful bond auction comes at a price

PORTUGAL reached its target of selling a total of €1.25 billion ($1.6 billion) of bonds maturing in 2014 and 2020 on January 12th and both offerings were over-subscribed. But Portugal paid a heavy price to make them so appealing; the yield on the June 2020 bond was a whopping 6.7%. That was lower than the 7% yield that ten-year bonds had traded at earlier in the week, before reports of heavy purchases by the European Central Bank (ECB) pushed it lower. But it is unsustainably high for a country with such so much public debt relative to its GDP. If Portugal is to remain solvent, its borrowing costs will have to fall much further. It is hard to imagine what might push its bond yields down other than concerted buying by the ECB, a de facto bail-out. It therefore seems likely that Portugal will eventually have to seek rescue funds from its euro-zone partners and the IMF, as Greece and Ireland have had to.

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