Portuguese Expensive Bond Sale Hints Bailout Need
Portugal’s latest bond auction was successful on Wednesday, but the yield offered for 1-year bonds has risen sharply, indicating that market is losing confidence in Portugal economy. The sale of 500 million euros worth 1-year bonds was oversubscribed by two and half times. The yield rose to 5.3%, which is too expensive for 1-year bonds. The previous sale of 1-year Portugal bonds yielded 4.8%. Moreover, some of these bonds might have been bought by Portuguese banks, funded by European Central Bank.
As usual, Portugal’s Prime Minister Jose Socrates reiterated that his country did not need outside help. What his country needed was confidence in its economy, he added. S&P rating agency placed Portugal on credit watch citing its huge debt. S&P said Portugal had not done enough to increase its labour flexibility and productivity, which means, Portugal has to decrease wages of the workers.
The yield for 10-year Portuguese bonds fell slightly on Wednesday, but remained at historically high level of 6.85%. However, the yield on German bonds that are considered the safest among the Eurozone countries remained at 2.67%. The difference between yield of German bonds and the yield on any particular country’s bonds is called bond spread of that particular bond of that country. This bond spread is widening day by day for the most indebted countries of the Eurozone despite huge bailouts offered to those countries.
Bailouts from the EU and IMF are supposed to increase the confidence of the market on the Eurozone countries, which is not happening. Greece bailout was supposed to prevent the contagion from spreading to other Eurozone’s indebted countries. It was not happened and Ireland had to tap for the bailout. A week before asking for bailout, Ireland Prime Minister bluntly rejected that his country would need a bailout. Within a week, he had to accept the aid from the EU and IMF as force mounted from its fellow Eurozone countries.
Even then, markets did not satisfy and continued to demand higher yields for bonds of the remaining indebted Eurozone countries, namely Portugal, Spain, Italy and Belgium. It seems to be certain that Portugal and sometime later, Spain, Italy and Belgium may need bailout from the European financial safety net.