Taking advantage of the sharp fall in bond yields in recent months, Portugal yesterday (23 January) issued its first long-term bond in almost two years.
IHS Global Insight perspective | |
Significance | Portugal yesterday (23 January) issued long-term debt for the first time since February 2011, a few months before requesting financial support. Moreover, figures suggest that the general government deficit was slightly below target in 2012. |
Implications | Portugal's return to the bond markets will certainly increase confidence that the worst of the Eurozone crisis is over. |
Outlook | Although this is definitely positive news, Portugal still faces a very difficult 2013, particularly given that economic conditions will remain very challenging. |
Portugal returns to long-term bond markets
In an act that provides more hope that the worst of the Eurozone crisis is over, Portugal yesterday (23 January) returned to long-term bond markets for the first time since requesting financial support. Specifically, Portugal sold EUR2.5 billion (USD3.3 billion) of an existing syndicated bond maturing in October 2017 with a coupon of 4.35%. The total amount sold was above an initial offer of around EUR2.0 billion. This was the first syndication since February 2011, only a few months before the country asked for a bailout in April that year.
Positively, demand was robust, with offers totalling more than EUR12 billion. According to figures released by the Portuguese Treasury, external demand for the bonds was strong. Indeed, only 7% of the total was sold to Portuguese buyers. Most of the demand came from investors in the United States and the United Kingdom, who purchased 33% and 29% of the total amount, respectively. The yield on the bonds was 4.891%, not far from yields on the secondary market for similarly matured bonds. Yields on Portuguese sovereign bonds have been rapidly trending downwards since the third quarter of last year. For example, the yield on the benchmark 10-year bond fell from a peak of almost 17% in January 2012 to below 6% earlier this week. This improvement was closely linked to the decision by the European Central Bank (ECB) to launch its unlimited bond purchasing programme – outright monetary transactions (OMT) - in September last year (see Eurozone: 7 September 2012: ECB Fleshes Out Bond-Buying Plan, Keeps Interest Rates at 0.75%), although the reduction in yields has also been helped by Portugal's strong compliance with the targets agreed with its official creditors.
Fiscal deficit fell in 2012
Meanwhile, figures released today (24 January) by the budget office show a strong reduction in Portugal's budget deficit in 2012. The general government shortfall is estimated to have stood at EUR8.329 billion last year, up from a deficit of EUR7.195 billion in 2011. However, the deficit was below a revised target – agreed with Portugal's official creditors in the fifth programme review – of EUR9.028 billion. These figures are on a cash basis. The deficit on a national account basis – which is the figure used to determine compliance with the economic programme agreed with the country's official lenders – is expected to be published on 15 February.
Outlook and implications
Portugal's return to the bond markets ahead of schedule would have been unexpected only six months ago. However, it is undeniable that the ECB's actions have had a very strong positive impact. Not only have they helped Portuguese sovereign bond yields, but they have also led to a sharp fall in Irish, Italian, and Spanish yields, considerably easing concerns regarding a Eurozone break-up. On the positive side, this is likely to boost confidence in Portugal's ability to survive inside the Eurozone. Lower bond yields are also likely to take some pressure off domestic interest rates, which is good news given Portugal's very high private debt levels. Moreover, yesterday's bond placement can be seen as the country's first step towards a full return to long-term bond markets, which is a necessary condition if it wishes to apply for OMT.
Nevertheless, it is important to highlight that the challenges remain huge. The economic environment continues to be very weak, with Portuguese GDP expected to contract for the third year in a row in 2013. Private and public sector deleveraging, high and rising unemployment, tight fiscal policy, and a difficult external environment will continue to keep the economy under pressure. Although the fiscal data published today suggest that fiscal consolidation is under way, figures released today by Eurostat (the European Union's statistical office) show Portugal's public debt levels hitting 120.3% of GDP at the end of the third quarter of 2012, the third highest in the Eurozone behind Greece and Italy.