PORTUGAL will go to the market for €1bn (£873m) today in its second debt sale in a week as the sovereign scrambles to avoid a bailout.
Following a second ratings agency downgrade yesterday by Moody’s, economists estimate that Lisbon has €4.6bn of funds left, but needs to refinance €9.2bn of debt and fund €5bn of deficit spending between now and the result of national elections in June.
That means the sovereign will need to raise at least €10bn during a period in which it has no government to reign in spending and when yields are already at record highs.
“What’s more, sharp and sustained falls in market yields seem unlikely as there is a significant risk that the government will fail to meet its budget deficit goal,” says Capital Economics’ Emilie Gay.
Newedge’s Bill Blain yesterday called the situation “pretty messy”.
Yields jumped yesterday after Moody’s slapped a downgrade on Lisbon’s debt, lowering it from A3 to Baa1, and said further actions could follow. The move follows a similar downgrade from S&P last week, and leaves the cost of Lisbon’s five-year debt at ten per cent and ten-year at 8.75 per cent.
Moody’s cited growing political uncertainty – Lisbon’s government collapsed after failing to pass an austerity budget recently – and worse-than-expected deficit figures for 2010 as reasons for the downgrade.
Portugal has a target of 4.6 per cent of GDP for its deficit this year, but its most recent release saw numbers for 2010 revised upwards to 8.6 per cent, versus its 7.3 per cent target.
And the signs are that Lisbon’s options are narrowing, as the European Central Bank (ECB) is increasingly reluctant to intervene in bond markets to keep yields under control.
Although the ECB could wade in during today’s sale, economists ultimately see its bond-buying programme as incompatible with a widely anticipated rate rise, since the latter will erode the value of sovereign bonds and exacerbate the bank’s capital losses.