Portugal buys breathing space with bond swap

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Published October 03, 2012

| Reuters

Portugal returned to bond markets on Wednesday for the first time since a bailout last year, swapping short for longer-dated debt to buy time to fix its public finances.

The country is in its worst recession since the 1970s and this may deepen if austerity measures expected to be unveiled later on Wednesday further undermine consumer confidence and spark more opposition to cost cuts and tax hikes.

The swap will make Portugal's debt repayments easier next year, giving it time to make the savings necessary for reducing debt and get the economy growing again so it can avoid a Greek-style debt restructuring.

The IGCP debt agency sold 3.76 billion euros ($4.86 billion) of October 2015 bonds, exchanging them for debt maturing in September 2013 bonds.

"The size of the swap is very decent and I guess it goes some way in reflecting that there are investors out there who have confidence in Portugal's and the euro zone's outlook," said

Orlando Green, debt strategist at Credit Agricole in London.

The swap to extend the maturity of the country's debt and follows similar operations by fellow bailout recipient Ireland.

The head of the IGCP debt agency, Joao Moreira Rato, said "this marks a first step for Portugal to regain access to medium- and long-term debt markets."

Under Portugal's 78-billion-euro bailout from the European Union and IMF, the country was envisaged to only return to finance itself in bond markets in the second half of 2013.

Buying up the Sept. 2013 bond now, before it matures, will help the country's financing needs next year. The amount it swapped represented 39 percent of the outstanding amount of the September maturity - the first not fully covered by the bailout.

"This swap operation was positive, as it reduced the redemption pressure in 2013 of 9.6 billion euros," said Ricardo Marques, debt analyst at Informacao Mercados Financeiros consultants.

PROTESTS

Still, Portugal faces growing economic challenges as the previous political consensus behind austerity was dented last month when the country saw its largest protest since the bailout following a government plan to raise social security taxes. The government abandoned the plan after the protests.

But Finance Minister Vitor Gaspar will announce alternative measures at 1400 GMT on Wednesday, which are likely to include higher income, capital gains and asset taxes. The government is also studying a tax on financial transactions.

The European Commission has already approved the new measures, it said on Monday.

Strikes against cost-cutting have risen in recent weeks, with both railway and metro workers staging periodic walk-outs all this week. Portugal's unemployment is already at record highs above 15 percent and could rise further as the recession extends into next year.

Portugal's largest union, the CGTP, is set to announce later on Wednesday whether to launch a general strike soon, after it held a large protest march on Saturday.

But investors appeared not to be overly worried about growing social strife.

"The recent political and social tension didn't have an impact, nor am I certain it had any relevance for this operation," said Filipe Silva, debt manager at Banco Carregosa in Porto.

While still high, Portugal's bond yields have fallen sharply this year, helped by the European Central Bank's plans to help hold down the borrowing costs of countries that have signed up to budget overhauls.

Benchmark yields have fallen to around 9 percent from highs near 17 percent in January. Ten-year yields were virtually unchanged on Wednesday at 8.9 percent.

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