Respite in the markets for Portugal after €78bn bailout

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The Independent Online

Market pressure eased on Portugal yesterday as details began to emerge about the country's €78bn (£70bn) bailout deal hammered out with the European Union and the International Monetary Fund.

The yield on 10-year Portuguese government bonds fell 11 basis points to 9.47 per cent, narrowing the difference in yield – or the interest rate demanded by buyers – between those bonds and similar German government debt.

Portugal's borrowing costs last week hit a record since the euro was introduced on fears that the country would default on its debt.

The cost of insuring Portuguese sovereign debt against default through credit default swaps fell by 29 basis points to 620 basis points yesterday – the lowest in two weeks.

The government had to pay a higher rate to sell three-month bonds in its first sale since the bailout deal was announced.

A sale of €1.1bn of treasury bills maturing in August was priced to yield 4.652 per cent compared with 4.046 per cent at the last sale of equivalent securities on 20 April.

Markets are waiting on more details of the plan, including the interest rate Portugal will have to pay on its borrowing, before giving a stronger vote of confidence to the country.

However, analysts said the yield on the three-month notes was less than the rate in the secondary market.

The three-year loan package agreed between Portugal and the EU gives the government more time to cut its budget deficit but officials warned that spending cuts could send the country into recession for two years.

Even before the austerity measures – which will also include tax rises – Portugal's economy barely grew over the past decade.

The bailout plan includes €12bn to shore up the country's banks, which will face requirements to increase their capital buffers. The country's banks have relied on European Central Bank funding in the past year and the rescue package is meant to put them in a position that will allow them to support the Portuguese economy.

The deal was agreed late on Tuesday to end a fiscal and political crisis that has engulfed Portugal for weeks.

Jose Socrates, the Portuguese prime minister, said the package did not require additional cuts this year on top of the measures already proposed by the government and rejected by parliament in March.

Greece pays an average 3.5 per cent for the first three years of its seven-and-a-half-year loans and 4.5 per cent after. Ireland is seeking better terms than the 5.8 per cent it currently pays.

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