Rising Bond Yield Sounds Alarm For Portugal
Egyptian soldiers stand guard outside the Maadi military hospital where former president Hosni Mubarak was transferred and is currently on life support after suffering a stroke in prison in Cairo, Egypt, Wednesday, June 20, 2012. The 84-year-old Mubarak suffered a "fast deterioration of his health" and his heart stopped beating, the state news agency MENA and security officials said. (AP Photo/Amr Nabil) / Amr Nabil
The rise in Portugal's 10-year bond yield came as investors were disappointed with the slow pace of progress in EU efforts to coordinate measures against a crisis that is more than a year old.
Government leaders came up with no concrete plan at a summit last week, delaying decisions to a March 11 meeting in Brussels. But a binding resolution on a comprehensive package likely won't come till another summit on March 24-25.
In the absence of a comprehensive eurozone debt strategy investors continue to fret about whether Portugal will be able to ride out the storm or will be forced to follow Greece and Ireland in taking a bailout, adding fresh momentum to the crisis.
An EU official in Brussels said Portugal's interest rates were clearly "unsustainable" at their current level. He spoke on condition of anonymity because he wasn't authorized to speak publicly on the matter.
Though Portugal is one of the eurozone's smaller economies, its fiscal collapse could stoke pressure on neighboring Spain, one of the bloc's biggest economies.
Portugal needs to raise up to ?20 billion on financial markets this year and faces two crunches: in April, when it has to meet a ?4.5 billion bond repayment, and in June when it has to find almost ?5 billion. Debt sales this year have drawn strong investor demand.
The European Commission, the EU's executive, and some member states have been pushing for the overhaul of the eurozone's crisis strategy to provide markets with more stability.
At the heart of the overhaul is the European Financial Stability Facility, the eurozone's contribution to the overall bailout fund. Apart from lifting the EFSF's lending capacity to the ?440 billion initially advertised, the Commission supports giving the fund new powers. These include buying government bonds directly on the open market to take pressure off prices and interest rates or supplying countries with short-term cash loans rather than multibillion long-term bailout packages.
Yet states are far from agreeing exactly what these new powers will be, and Germany - the largest contributor to the fund - has refused to sign off on changes to the EFSF without an agreement on the so-called "pact for competitiveness" from the rest of the eurozone.
France is backing Germany's efforts to boost growth by improving their competitiveness. Though no concrete measures have been proposed, documents circulated last week suggested they could include hiking retirement ages, getting rid of automatic inflation-linked wage increases and including constitutional limits on debt.
Portugal is struggling with the legacy of a decade of anemic growth during which the country racked up heavy debt, leaving its finances frail.
The 10-year interest rate on Portuguese bonds hit 7.6 percent on the secondary market Thursday - not far off the level that forced Dublin to accept aid - before falling back to 7.3 percent amid unconfirmed reports the European Central Bank was buying the bonds to halt the rise.
Emilie Gay, an analyst at Capital Economics in London, said several factors contributed to renewed concerns about Portugal.
"Plans for a quick overhaul (of the EFSF) have disappointed," Gay said, adding that there are some expectations that Portugal may be pressed to take a bailout as part of the agreement at the end of March.
On top of that, figures released earlier this week showed that the dependence of the Portuguese banking sector on lending from the ECB has continued to rise, as banks in other countries are reluctant to commit short-term funds.
While a recent bond sale went relatively well, the fact that the money was raised through a syndicate of banks rather than in a regular auction "was probably interpreted in quite a negative way by the markets," Gay said.
The tensions were localized, however, with Spain's 10-year bond yield down slightly at 5.2 percent. Germany's benchmark 10-year bonds also were slightly lower at 3.2 percent Thursday.
Portugal's minority government insists it can restore fiscal health without help.
The national debt agency announced Thursday it hopes to raise up to ?1 billion in a sale of 12-month Treasury bills in the middle of next week.
The government has introduced tax hikes and pay cuts to reduce debt and says tax revenue was up 15 percent in January. But the measures could cast Portugal into recession and worsen its plight.
The austerity policy has also added to political pressure on the government. The governing Socialist Party's candidate suffered a heavy defeat in last month's presidential election, and a recent wave of strikes continued Thursday with partial stoppages by rail staff and postal workers. Opposition parties say they may table a motion of no confidence in Parliament if the government proves unable to avoid a bailout.
The Lisbon stock exchange's benchmark index plunged 2 percent.
Gabriele Steinhauser in Brussels contributed to this report.
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