By CHRIS GRAEME [email protected]
Investor interest in buying Portuguese 10-year bonds has increased overall due to hopes that the worst of the recession may be over.
According to the Financial Times, demand has been strong in October with the sale of 760 million Euros worth of one-year treasury bills.
However, failure by the Government and opposition parties to reach an agreement by Wednesday over the State Budget for 2011 is likely to send Portugal’s borrowing costs to new heights. The final vote for the budget is scheduled for November 3.
Two weeks ago, average yields (interest on bonds) fell from 3.33 per cent to 2.88 per cent while the bid to cover ratio increased to a healthy 2.4 times.
Portugal was riding on the crest of a wave of optimism from investors and financial agencies which have been impressed as countries like Portugal, Spain and Ireland attempt to bring public spending under control and restore financial balance.
Investment bank analysts have also suggested that bonds from these countries are under less pressure because many investors expect the international community to extend loans to Greece which had borrowed 110 billion Euros in May.
The interest rates on Portuguese 10-year bonds fell by almost one per cent to 5.69 per cent as a consequence – below the historically high levels registered at the end of September – before rising 6.6 basis points to 5.79 per cent last week as continued lack of consensus within the Portuguese Parliament overt the budget generated a fresh round of concerns at Portugal’s ability to comply with EU demands in cutting the deficit and not default on loans.
Other reasons why pressure on Portuguese sovereign debt has eased has to do with the bold package of austerity measures announced by the Government earlier in the month, which includes cuts in public sector salaries, holiday subsidies, child support and public spending and increases in taxes.
Portugal is trying to cut its budget deficit from 9.4 per cent to 4.6 per cent of GDP by next year to satisfy the European Union’s Stability & Growth Pact (SGP) regulations which prefer the budget deficits of Euro zone countries to fall below three per cent of GDP.
Not an easy task given that Portugal’s social spending bill rose and tax revenues fell in the first three-quarters of 2010 causing some economists to doubt the Government’s ability to meet the ambitious SGP deficit pledges.
For example, the leader of the PSD, Pedro Passos Coelho, believes that the budget deficit targets for both 2010 (7.3 per cent) and 2011 (4.6 per cent) are no longer feasible and has called for Portugal’s Stability & Growth Pact Programme to be renegotiated with the European Commission.
The opposition PSD party, which holds the balance of power in Parliament, says it won’t vote through the Budget unless the Government reduces its planned two per cent VAT hike down to one per cent and offsets this with larger spending cuts.
The PS Government doesn’t want further spending cuts because it believes these would harm key services such as health and education and encourage a double-dip recession, likely after Government forecasts for growth in 2011 are barely expected to extend beyond 0.2 per cent growth after one per cent growth this year.
Over the weekend, other opposition parties also indicated that they would vote against the State Budget proposal for 2011.
After hours of negotiations spread out over two days on Saturday and Sunday, the various party delegations reached a stalemate with the left-wing Bloco de Esquerda and Communist parties joining forces with the right-wing CDS-PP party continuing to reject the Government’s proposals.
To these dissenters are joined the angry voices of the country’s main unions which have slammed the austerity measures as “brutal” and have organised a crippling General Strike for the end of next month.