MercoPress. South Atlantic News Agency

“Greek” syndrome hits Portuguese bonds and economic prospects

Bank of Portugal Governor Vitor Constancio pessimistic about short term outlook

Portugal's debt agency IGCP cut its planned T-bill placement to 300 million Euros from 500 million on Wednesday as yields soared 49% compared to January's placement, following on events in Greece and Bank of Portugal Governor Vitor Constancio's gloomy comments on the country’s economy.

Traders said the highest yield bid during the auction was over 2 percent. The only yield accepted by IGCP was 1.379 percent, up from an average yield of 0.928 percent on Jan. 20 when the IGCP last sold the same issue.

“This was a trigger. The market is now very jittery about Portugal following Greece, where the problem also started in the bill segment, short-end of the curve and extended into longer maturities,” said a bond trader.

“The market's perception is that Portugal is the second country with fiscal problems after Greece, although it's a completely different story, especially in terms of credibility.”

Portuguese bonds have been under additional pressure since last week, when the government said the budget deficit spiked to 9.3% of GDP last year from 2.6% in 2008. The government pledged to cut the deficit to 8.3% this year and to below 3% by 2013.

Bank of Portugal governor Constancio also said on Tuesday that he was relatively pessimistic about the country's short-term outlook. He anticipated the Portuguese government will have to make better efforts to contain spending and also may need to raise taxes to cut the country's budget deficit to 3% of gross domestic product by 2013.

Portuguese Prime Minister Jose Socrates, meanwhile, defended the country's economic situation in an interview with French daily Liberation on Wednesday, saying the country’s economic situation is not worrying.