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The quest for liquidity

The Portuguese bond market is caught in a pincer grip. More liquidity is required to attract foreign investors but that can only be achieved if the trend for domestic investors to move to other euro markets is at least partly reversed. Some success in improving the situation has been achieved but there is much still to be done.

Portugal became a full member of the euro club in January 1999, thereby eliminating exchange rate risk on its domestic sovereign debt.

However, its bonds have continued to trade at a substantial spread premium to comparable German or French issues. That's attractive for investors, but a challenge to the country's sovereign liability managers.

Most analysts attribute this premium to one of several factors: poor liquidity for many issues in the secondary market, the way the debt is structured, continuing borrowing requirements, and the overall health of and outlook for the Portuguese economy. Depending on whom you talk to, the mix is different. The fact remains that spreads on Portugal's five-year and 10-year issues have moved between 29 and 41 basis points over Germany's throughout the last year.

"It is our purpose to do something to improve this situation", says Vasco Pereira, president and CEO of the Instituto de Gestão de Crédito Público (IGCP), the autonomous organization that has been responsible since 1997 for managing Portugal's sovereign debt. Just back in Lisbon from a European roadshow, and with the views and criticisms of major institutional bond investors still ringing in his ears, Pereira is nonetheless in ebullient form.

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