Portugal, Ireland build cash buffer, ease debt repayment fears
by Emelia Sithole-Matarise and John Geddie

Reuters    Translate This Article
2 July 2014

LONDON, July 2 (Reuters) - Portugal and Ireland, two of Europe's most indebted countries, took advantage of historically low borrowing costs to fund near-term debt repayments ahead of schedule on Wednesday.

Portugal was poised to raise $4.5 billion from the sale of its first dollar bond in more than four years as it set about raising funding for next year. The deal was due to price later in the day.

Ireland, meanwhile, cut its funding requirement for 2016 by 2 billion euros through a bond swap and buyback.

'Primary markets are wide open and as we are seeing peripheral treasuries are trying to get as much ahead as they can in terms of their issuance,' said Commerzbank strategist Michael Leister.

'The overall positive backdrop is not going to change given this negative ECB rates policy from the ECB. The hunt for (yield) pickup will continue.'

Around 37 percent of Portugal's 138 billion euros of debt falls due by the end of 2016, while around 23 percent of Ireland's 144 billion euros also matures during that period, according to Thomson Reuters data.

Both countries had to be bailed out just over three years ago as investors, fearing neither would be able to service their massive debt loads, turned their backs.

Even though both countries' debts now stand at euro era highs of over 120 percent of economic output, a commitment by the European Central Bank to do 'whatever it takes' to save the euro zone, and hard-won bailout exits earlier this year, have seen investors return.

Ireland began reducing its post-bailout funding requirements with a bond switch in January 2012 that marked its return to the debt markets, following up with a second switch later that year.

Other peripheral euro zone countries have also used bond swaps and buybacks to reduce their funding needs as their borrowing costs slid to historic lows.

Ireland's borrowing costs over 10 years dipped to fresh record troughs while Portugal's hit their lowest since 2006 last month, after the ECB announced a raft of measures to shore up weak economic growth and counter the threat of deflation.

PLANNING AHEAD

Having already raised all its funding needs for 2014, Portugal's sale of a new 10-year dollar bond was its first in the currency since March 2010.

The deal attracted over $10 billion of demand, prompting Lisbon to more than double its initial size to $4.5 billion. It was set to price around 265 basis points over the 10-year U.S. Treasury, which equates to a yield of around 5.2 percent at current market rates.

While the money raised will help offset some of Portugal's upcoming repayments, Citi's global head of rates strategy Alessandro Tentori said the country appeared in no desperate rush to lock in low rates that will likely remain for some time.

'Market levels are what they are and they have to rebuild a curve and come back to the market,' said Tentori.

Bond investors appeared unfazed by an investigation into three holding companies of the country's biggest bank, Banco Espirito Santo, which had triggered some volatile trading in the sovereign bonds early this week. Investors appeared to put trust in the government's conclusion that there was no threat to financial stability or public accounts from the probe.

Portugal's 10-year bond yields were 3 basis points up at 3.65 percent, with the debt outperforming most of the euro zone debt market which was on the back foot after forecast-beating U.S. ADP private sector employment data prompted some profit-taking.

Irish 10-year yields were 4 bps higher at 2.41 percent. while Germany yields, the benchmark for euro zone borrowing, were up by a similar amount at 1.29 percent.

(Editing by Jeremy Gaunt)

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