LISBON, Portugal – Portugal sold 10-year bonds Tuesday for the first time since it needed a bailout in 2011, representing a milestone in efforts to restore investor confidence in the frail eurozone country and prove that contested austerity policies are paying off.
Though Portugal remains a ward of its bailout creditors and a full economic recovery will still take years, its success in raising 3 billion euros ($3.9 billion) on international markets was a welcome positive sign for European leaders eager to put a three-year financial crisis behind them.
Portugal, one of five eurozone countries that have needed rescue, hadn’t sold long-term debt since it needed 78 billion euros ($102 billion) two years ago to escape bankruptcy. The three major international ratings agencies downgraded Portugal’s credit worthiness to junk status as the debt-heavy country fell victim to the eurozone financial crisis that spooked investors.
Growing concerns that Portugal had too much debt and too little growth made markets uneasy about lending it money. That sent the interest rate, or yield, that the country pays on its 10-year bonds above 7 per cent — a rate that made selling debt unaffordable and which compelled Portugal to ask for help from the International Monetary Fund and its European partners.
The Treasury said Portugal sold the bonds at a rate of 5.669 per cent Tuesday. Foreign investors bought 86 per cent of the bonds, and demand was so strong that Portugal could have sold 10 billion euros’ worth, Treasury Secretary Maria Luis Albuquerque said.
As the 17-nation eurozone tries to reduce its debt load, Portugal has been at the heart of the debate about the merits of the austerity policies demanded by the bailout creditors in return for their loan.
Many Portuguese and international economic experts blame the last two years of pay cuts and tax hikes for the record jobless rate of 17.5 per cent. The government forecasts a third straight year of recession in 2013.
But Foreign Minister Paulo Portas told a business meeting in Lisbon the bond sale is evidence the government’s economic reforms are working. Average yields on Portuguese 10-year bonds recently fell to around 5.5 per cent. Last year, the yields were in double digits.
Finance Minister Vitor Gaspar described the bond sale as “a great success.”
“We have not only completely got the financing we need for this year, we’ve also started gathering the financing we need in 2014 so as to ensure we can exit the bailout program successfully,” Gaspar said in Brussels.
The sale was also good news for the bailout lenders, whose inspectors returned to Lisbon on Tuesday to assess the country’s compliance with the three-year recovery program that is supposed to restore Portugal’s fiscal health.
Portugal is keen to show it is more like Ireland — which has stoically abided by its austerity program and also held its first bond sale this year since its financial rescue — than Greece, which needed a second bailout and where street protests have turned violent.
The coalition government, though, has had a hard time persuading the Portuguese their sacrifices are worthwhile. Prime Minister Pedro Passos Coelho last week announced plans to cut another 4.8 billion euros over the next three years.
Government workers, pensioners and public services will bear the brunt of those unpopular cuts. But Passos Coelho said government spending must be reduced or the rescue funds, which are disbursed in installments, won’t be released by the bailout lenders.