Euro Update (15): Worsening Portuguese debt situation and sneaky debt auctions

I’ve mentioned that Portugal would need to access international markets sometime soon, in order to finance itself. I’ve been painting a doomsday scenario about it. In my view all Portugal needs is for market jittery to be timed with one of its auctions and perfect storm will ensue that will lead to a EFSF rescue.
Much to my relief, this was not the case when Portugal accessed the markets on Tuesday, February 8 to the tune of €3.5M, with demand apparently totaling up to €6M. So things don’t seem to have gone so bad.   As the Image below shows, the UK seems to have had some appetite for Portuguese debt.

Despite the fact that this was a syndicated debt auction, they were very sneaky, as no ex-ante reference was made to the auction on the debt agency’s website.

In order to understand how the markets price Portugal, and in the impossibility of accessing ReuterThomson Datastream information, the best thing to do is to study the interest rates charged for this new line of debt. On this occasion, Portugal was charged a 6.4% interest rate. This you might be forgiven to think was an imporvement to the 6.67% it paid on its January auction, but you’d still be wrong. The truth is that these are 5 year bonds where as the previous were 10 year bonds. Actually at that time (January 2010), Portugal also auctioned a number of 5 year bond and the sad truth is that these were charged an interest of  5.449%. This implies that  for a similar time span, the cost of Portuguese borrowing increased by ~ 17.43%. So there is nothing to celebrate. It’s fair to conclude that the situation continues to get worse…

The funny thing is that it took me ages to realise this. So in earlier drafts of this post I had admitted that I might have been wrong and that may be markets were feeling generous. As I went on, “May be I’m missing something. May be markets were actually relieved by the news of the European Council, which may have endowed Portugal with some credibility. May be I was just wrong.”
To gain a wider perspective I looked at the specialised media, and came across the following three articles:
The first one from the WSJ gives a lot of facts but very little insight.
The second one, from the FT, discreetly argues that markets have factored in the fact that any result in terms of EU policy will only be arrived at in the March European Council. That being said it warns that an inability to reach an agreement at that time would prove fatal for Portugal and would probably lead to extended contagion.
The third one, also from the FT, is the most recent article and offers the most insights. It discusses the aftermath of the mentioned bond auction. Moreover, According to it, “Hedge funds were selling Portuguese debt after purchasing bonds at a syndication of five-year bonds just 24 hours earlier, brokers said.” In the mean time, “Portuguese 10-year bond yields jumped to 7.35 per cent” an unsustainable value by the country’s own admission.

Clearly, the confusingly bleak picture painted by this last article supports my previous comments. Portugal is in bad shape and this auction is representative of that fact.