Friday, January 14, 2011


But Portugal paid dearly for its success: the yield on the June 2020 bond was a whopping 6.7%. Granted, that was lower than the 7% at which ten-year bonds had traded earlier in the week (see chart 1), before reports of heavy purchases by the European Central Bank (ECB) pushed the yield down. But it is unsustainable for a country whose public debt is high and rising. Unless its borrowing costs plummet, Portugal will eventually have to seek rescue funds from its euro-zone partners and the IMF, as Greece and Ireland have already been obliged to do.
Modest achievements are talked up. José Sócrates, the prime minister, said this week that Portugal’s 2010 budget deficit would fall “clearly below” the government’s target of 7.3% of GDP. Portugal was one of the few EU countries to cut its deficit by more than two percentage points in 2010, he said. Yet revenues booked from the transfer of Portugal Telecom’s pension funds to the state explain much of the improvement. The dilatory pace of fiscal consolidation is unlikely to assuage investors for long. The auction’s success may offer only temporary respite. Investors in the euro zone’s bond markets have seen the film before.


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