Portugal signals full steam ahead for bond auctions after 'great' sale

LISBON Thu Apr 24, 2014 11:46am BST

Portugal's Prime Minister Pedro Passos Coelho holds a news conference at an European Union leaders summit in Brussels March 21, 2014. REUTERS/Laurent Dubrule

Portugal's Prime Minister Pedro Passos Coelho holds a news conference at an European Union leaders summit in Brussels March 21, 2014.

Credit: Reuters/Laurent Dubrule

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LISBON (Reuters) - Portugal plans bond auctions across a range of maturities in the second half of the year after a strong inaugural sale of 10-year paper that showed its debt financing programme was getting back to normal, the treasury secretary said on Thursday.

Wednesday's sale, Portugal's first bond auction in three years and at which benchmark yields hit record lows, gave the country more freedom to choose whether to make a clean break from its bailout or seek the backstop of a precautionary loan, Isabel Castelo Branco told Reuters in an interview.

"The fact that Portugal can now finance itself on its own in the market, meeting investor expectations and capturing demand that did not exist a few months ago, obviously gives us greater capacity to decide" on the bailout exit, she said.

"The auction is a great signal and means the normalisation of the debt issuance process.

Portugal's EU/IMF rescue programme formally ends on May 17 and the government has promised to decide whether to request a European standby loan thereafter by the May 5 meeting of European finance ministers.

Its 10-year borrowing cost at the auction, of 3.575 percent, was very close to Ireland's yields of around 3.5 percent about a month before its bailout exit in December. Dublin decided to go it alone without a safety cushion of a standby agreement.

"This yield, the volume and the overall situation we are in now give us room for manoeuvre in taking the decision. But just because the yield is the same (as it was in Ireland), does not mean the decision will be the same," she said.

Whatever route Portugal chooses, the pace of bond auctions will be stepped up, said Castelo Branco, who is in charge of treasury operations at the finance ministry.

Portugal plans another bond auction this quarter and she said more would follow in the second half, offering paper along the yield curve at two, five and 10 years to diversify supply and better manage the country's financing needs.

"The idea is to keep them regular, which has the advantage of both the issuer and potential investor knowing that there is regular supply, which is relevant for managing expectations and needs of both," she said.

Syndicated bond issuance, in which a group of banks helps organise the placement and which Portugal resumed early last year, would also continue.

RATINGS HOPES

Many investors had preferred to steer clear of Portuguese debt after its debt crisis erupted, but they were now returning in a "systematic" fashion to buy or show their interest, in what Castelo Branco said was a recognition of the brighter economic and financial picture the country now presents.

Portugal has, along with other peripheral euro zone nations, also benefited from a broader economic upturn in the currency bloc, prospects of European Central Bank asset purchases and the shrinking investor returns offered by core European debt.

Castelo Branco said a credit outlook upgrade by ratings agency Fitch earlier this month to "positive" from "negative" was a significant change that could bring about more upgrades - be it in ratings or outlooks - this year.

"I think it is an unequivocal tendency. As I see it, one of the reasons Portuguese yields have adjusted so much is because the market is also expecting upgrades by ratings agencies."

Fitch rates Portugal at BB+, which is just one notch into junk territory - the highest rating that any of the main agencies have for the country and the outlook move puts Portugal closer to regaining investment grade.

Castelo Branco said Portuguese debt yields were likely to continue coming down, provided the country's economy keeps recovering and budget consolidation remains on track.

(Writing by Andrei Khalip, editing by Axel Bugge, John Stonestreet)

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