Portugal Making Early Return to Debt Market

Portugal launched on Wednesday its first medium-term debt issue since receiving an international bailout in May 2011, making the critical step of returning to the borrowing markets much quicker than expected.

According to several business media, the five-year bond issue, the first since February 2011, began early on Wednesday with the target of raising 2.0 billion euros ($2.7 billion).

The country's debt management agency IGCP said late on Tuesday it had mandated four banks to launch "in the near future" the borrowing via a syndicated loan.

Such an operation, which consists of borrowing from a group of banks selected in advance which then try to sell the debt on to other investors, would be an important gauge of market interest and confidence in Portugal's debt.

Dow Jones Newswires reported that by mid-morning the demand had reached 8.0 billion euros and that the rate of return to investors was expected to be about 5.0 percent.

Rising borrowing costs pushed Portugal into taking a 78-billion-euro bailout in May 2011 from the European Union and International Monetary Fund.

It has since only been able to borrow on short-term debt markets, but the EU and IMF had planned for Lisbon to begin to start financing itself on markets again in September this year when it must make its first debt payment not covered by bailout funds.

In a sign of growing investor confidence, the rate of return to investors on Portugal's 10-year bonds fell on Tuesday under 6.0 percent on the secondary market for the first time since December 2010.

The yield on Portugal's 10-year bonds rose to as high as 17 percent in January 2012.

A 6.0 percent interest rate is seen as a key threshold above which a country in a low inflation and low growth environment will have difficulty supporting its debt.

Investors could also take reassurance on Tuesday from news that Portugal had met its 2012 public deficit target of 5.0 percent of gross domestic product.

Portugal was required to make sharp spending cuts and tax rises to receive the EU-IMF in order to return its public finances to a sound footing.