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Portugal makes early return to debt market

by Thomas CABRAL
Two elderly woman standing on their doorstep watch a demonstration against the government's austerity measures in front of Belem presidential palace in Lisbon on December 15, 2012.

Portugal launched on Wednesday its first medium-term debt issue since it received an international bailout in May 2011, making the critical step of returning to the borrowing markets much quicker than expected.

The five-year bond issue, the first since February 2011, raised 2.5 billion euros ($3.3 billion) at a rate of 4.891 percent, treasury official Maria Luis Albuquerque said.

Given investor demand for more than 12 billion euros, the country's debt management agency IGCP decided to increase the offer from the initial level of 2.0 billion euros.

Rising borrowing costs pushed Portugal into taking a 78-billion-euro bailout in May 2011 from the European Union and International Monetary Fund.

Since then it has only been able to borrow on short-term debt markets, but the EU and IMF had planned for Lisbon to begin to start financing itself on markets again in September this year when it must make its first debt payment not covered by bailout funds.

"This is an important step in our path towards reestablishing the credibility of Portugal," said Economy Minister Alvaro Santos Pereira.

"We have succeeded in showing the world that Portugal is different from other countries in difficulty," he added.

In a sign of growing investor confidence, the rate of return to investors on Portugal's 10-year bonds fell on Tuesday below 6.0 percent on the secondary market for the first time since December 2010.

The yield on Portugal's 10-year bonds rose to as high as 17 percent in January 2012.

A 6.0 percent interest rate is seen as a key threshold above which a country in a low inflation and low growth environment will have difficulty supporting its debt.

Investors could also take reassurance on Tuesday from news that Portugal had met its 2012 public deficit target of 5.0 percent of gross domestic product.

Portugal was required to make sharp spending cuts and tax rises in exchange for the EU-IMF aid and to return its public finances to a sound footing.

"It is a big step in the right direction, but full market access is more than 'just' reopening a five-year bond," Commerzbank analyst David Schnautz noted.

"A 'return to the markets' is a road on which one moves gradually, but this operation evidently has great symbolic value," said Rui Paulo Santos, an economist at BPI bank.

Among the factors which enabled Portugal to push up its return to the markets "it must be underlined the promise of unlimited support from the European Central Bank," he added.

The ECB unveiled last year its so-called OMT programme, which is for eurozone countries implementing a bailout or precautionary programme and borrowing on long-term debt markets.

Once it has returned to the debt markets Portugal would be to ask the European Central Bank to buy its bonds under its as-yet untested OMT programme.

ECB intervention would give investors confidence they could sell the bonds later if they wanted to, without major losses.

Portugal also received the support Monday of eurozone finance ministers to have the repayment period of its bailout loans extended, in order to improve its finances and ease its return to debt markets.

EU finance ministers could make a final decision on Portugal's loans by March. Greece had the repayment period on its bailout loans extended last year, following which Ireland and Portugal were promised similar treatment on their bailout loans.