Portugal successfully auctions debt despite rating downgrade

Feb 15, 2012, 12:49 GMT

Lisbon - Portugal met targets by raising 3 billion euros (3.9 billion dollars) in a debt auction Wednesday, while also lowering interest rates, despite concern that it may need a second international bailout.

Two-, six- and 12-month bonds all fetched lower yields than at their previous auctions. The interest for two-month bonds dropped to 3.85 from 4.07 per cent, for six-month bonds to 4.33 from 4.46 per cent and for one-year bonds to 4.94 from 4.99 per cent.

The auction showed that investors saw risks associated with Portugal as having diminished, said Filipe Silva, an analyst at Banco Carregosa bank.

The investors were not daunted by an announcement by Moody's ratings agency that it was downgrading Portugal's credit rating to Ba3 from Ba2 earlier this week. Ba2 is already considered a junk-level rating.

The ratings agency Standard & Poor's also downgraded seven Portuguese banks late Tuesday.

Portugal's economy is expected to contract 3 per cent this year, raising the possibility that the country may need more rescue funds from the European Union and the International Monetary Fund.

Lisbon was granted an initial bailout worth 78 billion euros after its borrowing costs rose to unsustainable levels in May.

Experts from the 'troika' formed by the EU, the IMF and the European Central Bank are visiting Lisbon this week to assess Portugal's performance under the bailout programme. They were expected to be satisfied and to release a third loan tranche.

Prime Minister Pedro Passos Coelho's conservative government has slashed spending, raised taxes, launched privatizations and reformed the labour market.