Financial markets reward Portugal belt-tightening | News | DW | 18.07.2012
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Financial markets reward Portugal belt-tightening

Portugal has sold debt bills worth 2 billion euros ($2.45 billion) at lower interest rates - a sign of growing investor confidence in the debt-laden country. Portugal's creditors believe a turnaround is within reach .

The interest Portugal had to pay on its 12-month treasury bills had fallen to 3.505 percent from 3.834 percent in June, the government in Lisbon announced on Wednesday, after auctioning off a total of 2 billion euros worth of sovereign debt.

The rate of interest on 6-month debt declined to 2.29 percent from 2.65 percent at the previous auction, underscoring a trend towards lower borrowing costs for the country that started a few months ago.

Portugal can only access short-term capital markets because it was bailed out by the European Union in May last year with a rescue package worth 78 billion euros.

Since then, the country has been laboring under a fiscal adjustment program imposed by its EU and International Monetary Fund (IMF) creditors, aiming to reduce Portugal's budget deficit to 4.5 percent of gross domestic product (GDP) this year and to 3 percent in 2013.

Filipe Silva, debt manager at Banco Carregosa, believes lower borrowing costs mean that there is "greater investor confidence" in Portugal's adjustment.

"The fact that the yield is well below Spain's shows that Portugal is not suffering from contagion from the neighboring country", he told the Reuters news agency.

And Orlando Green, debt strategist with Credit Agricole in London, told the same news agency that the fall would show that politicians "were making progress, albeit at a slow pace."

Challenging tasks ahead

Portugal is planning to fully return to capital markets in late 2013 after it was cut off from longer-term debt refinancing in the wake of the bailout.

However, the yields of country's existing benchmark 10-year bonds remained unchanged on Wednesday trading at around 10 percent in secondary debt markets.

On Tuesday, officials from the European Commission and the IMF warned that Portugal's efforts to reduce its public deficit might be hampered by a large drop in tax revenues as a result of a slowing economy.

Nevertheless, they said that the government in Lisbon had a "reasonably strong" chance of turning the country around.

uhe/ng (AFP, Reuters)