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Capital Markets

Portugal seizes opportunity with €3 billion bond sale

Issuer pounced as brief moment of stability returned to sovereign markets; was not tempted to increase size of deal, despite large orderbook

Portugal announced a €3 billion sale of 10-year bonds today, hoping to take advantage of the optimism around capital markets that the European Union is close to agreeing a bailout of Greece.

Portugal’s bonds have been hit hard in recent weeks by fears over the ramifications of that Greece losing access to international bond markets and being forced into default. Matters weren’t helped when Greece decided to upsize a planned €5 billion issue of five-year bonds to €8 billion, only to see the bonds sold off in the secondary market. 

In announcing its deal, Portugal is intending to avoid Greece’s mistakes.

“Our approach is to stick to the amount we have announced,” said Alberto Soares, chairman of Portugal’s government debt agency in Lisbon, before the deal was announced. “We don’t announce a size and then go and execute a different size.”

Portugal is pricing the bonds to sell at 140 basis points over the mid-swaps rate, a 20bp premium to where its existing 10-year benchmark currently trades, which it had sold last February at a price of 135bp over mid-swaps.

By taking advantage of favourable conditions, Portugal feels it is under less pressure than its more troubled peers to go to the bond markets, says Soares.

“Obviously there was a contagion effect, but so far we can say we haven’t experienced any difficulty in accessing the market,” Soares told Euromoney by phone yesterday. “We are a small issuer when compared to our peers, with a total planned issuance in 2010 of €22.5 billion. That gives us a significant amount of flexibility. We feel less pressure.”

Still Portugal has a point to prove to the European Union and the ratings agencies. It has pledged to reduce its budget deficit of 9.3% of GDP by more than half in three years.

In a report today, Moody’s Investors Service says that Portugal’s rating is subject to some moderate downward pressure as illustrated by the negative outlook, but that its situation was not directly comparable to that of Greece.

“[The pressure] calls our attention to need to provide for information to the market,” said Soares. “Portugal has a reliable statistical system, the institutional framework that produces the figures is a credible one. I think markets will realise that.”

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