After a brief respite at the start of this year, pressure has built up again on the Portuguese sovereign debt market, with the yield on the benchmark 10-year government bond on Thursday hitting yet a new high since the euro was introduced.
Market operators said that while the European Union has made the right noise about beefing up the emergency fund it has set up for euro-zone countries, investors are starting to get nervous about the lack of specific progress on this front.
Portugal's 10-year bond yield touched a record 7.6 percent early Thursday before intervention by the European Central Bank pushed it back down to around 7.3 percent. Dealers said after a two-week hiatus the ECB was back in the market buying five-year Portuguese bonds. The spread with the German 10-year bonds hit a high of 440 basis bonds before moving back to levels just above the 400-basis-point level.
"The markets are looking for more Europe, not less"
The government managed to place 10-year bonds last week at a yield of 6.7 percent, below the 7-percent mark that the Socialist administration of Prime Minister José Sócrates has said might lead it to consider following the path of Greece and Ireland in seeking external help to deal with the debt crisis.
The minister responsible for the prime minister's office, Pedro Silva Pereira, insisted yesterday that Portugal was still in a position to be able to finance itself in the market. He said high yields "do not reflect the fundamentals of the economy."
However, the leader of the opposition Social Democrat Party (PSD), Pedro Passos Coelho, described current yields being asked by investors as an "unsustainable cost in the medium-to-long term." The center-right leader said that if the situation persists, "there will have to be coordinated action by Portugal and Europe."
Portuguese national news service Agência Lusa quoted Amadeu Altafaj, spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn, as saying that the markets remain nervous despite Portugal's efforts to rein in its budget deficit. Altafaj said it was important for the euro zone to take rapid decisions to provide a "comprehensive" response to the debt crisis.
The EU is looking to extend the size and scope of the European Financial Stability Facility (EFSF), but Germany has suggested this be linked to greater coordination of euro-zone member countries' economic policies.
"We need to make progress in coordinating economy policy and not just budgetary oversight," Bloomberg quoted Altafaj as saying in Brussels. "The markets are looking for more Europe, not less, in order to improve surveillance of all these imbalances," Altafaj said.
He said effective sanctions should be put in place to punish countries that fail to live up to their commitments.
Portugal managed to trim the shortfall in its books to around 7 percent of GDP last year from 9.3 percent in 2009, and is aiming to cut it to 4.6 percent this year through tax hikes and spending cuts.