Sovereign debt: Portugal tries to show how it’s different
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Sovereign debt: Portugal tries to show how it’s different

Its successful 10-year bond issuance was no fluke. Despite the noise around its fiscal position, the country has relatively modest borrowing needs, a track record of tackling deficits and good banks. But the challenges for its sovereign funding team are unlikely to disappear any time soon. Philip Moore reports.

SELDOM HAS A sovereign benchmark bond been awaited with such eagerness and apprehension as last month’s 10-year issue from Portugal. Following the disastrous aftermarket performance of Greece’s €8 billion colossus in January, the general consensus was that Europe’s capital market – and by extension the euro economy – could ill afford another debacle. Apparently a spectacular success at first, when it generated an order book of €25 billion, the Greek benchmark was bayoneted in the secondary market by hedge funds, widening within days by more than 50 basis points from its launch spread of 350bp over mid-swaps.

It was not just the performance of the Greek bond that had left Portuguese bonds and equities looking distinctly off-colour by early February. First, the government’s 2010 budget proposals included an upward revision of 2009’s budget deficit to 9.3% of GDP, which was 1% higher than expected. Soon afterwards, in an uncanny echo of unfortunate remarks made by his counterpart in Greece late last year, Bank of Portugal governor Vitor Constâncio hardly reassured jittery investors when he publicly described Portugal’s economic situation as "serious and difficult".

Alberto Soares, chief executive of Portugal’s treasury and government debt agency (IGCP)

"I think that Portugal can still be described as having moderate debt levels in comparative terms"

Alberto Soares, IGCP

Already queasy investors were made a little queasier when a one-year auction of treasury bills, euphemistically described by bankers as "awkward", was scaled back from €500 million to €300 million, at a yield of close to 50bp above the average at the previous month’s auction.

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