Portugal approaches flash point

Markets are showing signs of stress over Portugal following Moody’s three-notch downgrade of Greece as we approach a significant bond auction on Wednesday.

Yields on the ten-year government bond reached 7.65 per cent today – a euro lifetime high – indicating Lisbon would need to pay these sorts of levels if it tried to issue ten-year debt now. (Or Wednesday.) If it goes ahead, the auction is intended to raise €0.75-1bn. This is optimistic, however. The last two auctions raised just €1.25bn between them.

So, assuming Wednesday’s auction raises €0.75bn (optimistic), the IGCP will have raised about €2bn since the start of the year from the market in bonds. Rumour has it that the agency has about €4bn in cash. So that’s €6bn, excluding bills. So what does Lisbon’s debt management agency, the IGCP, need, and by when? The answers are sobering.

Central government requirements are €20bn for the year. Existing loans that are due to expire and will need to be refinanced include €4.5bn in April and €5bn in June (and that’s without exploring the shorter-maturity bills that are due to expire).

As amounts raised by bonds have fallen, amounts raised by shorter-maturity bills have stayed constant, meaning the average maturity of debt held by Portugal is falling. The country has raised €4.5bn in bills so far this year, with another auction planned next week, March 16. This is bad news in the medium-term as it will make the country more vulnerable to external shocks. It is probably not at the forefront of policymakers’ minds at the moment, however. Wednesday is what matters at the moment. After that, Lisbon will be awaiting Moody’s credit review of the country, due before March 21.