LISBON: Portugal's short-term borrowing costs spiked at a bill auction on Wednesday, reflecting an increase in concerns about Lisbon's ability to wean itself off international aid by mid-2014.
European Union and International Monetary Fund inspectors started a bailout review in Lisbon on Monday amid calls from Portuguese officials to further relax a target for next year's budget deficit so as not to compromise a fledgling economic recovery.
The country's deputy prime minister has suggested a precautionary new loan deal is on the cards for next year but European officials do not seem inclined to give it more leeway on the budget goals, pointing to tensions ahead between the two sides.
"We aren't seeing any of the panic that we saw a few months ago and the political scene has stabilized but what is worrying is that funding needs increase significantly next year," said Nicholas Spiro, managing director at Spiro Sovereign Strategy.
"Portugal bond yields, even compared with Spain and Italy, stick out like a sore thumb and are conspicuously vulnerable."
Portugal's 10-year bond yields - or how much it would cost it to borrow from the market over that period - have risen back above the psychologically-important 7 percent mark since reaching pre-bailout lows of around 5 percent in May.
They eased slightly on Tuesday and Wednesday, largely under the influence of broader moves related to a hotly anticipated US Federal Reserve meeting.
The IGCP debt agency sold all 1.25 billion euros of 3- and 18-month Treasury bills on offer. The 2.293 percent yield on the 18-month paper was the highest since January and up 69 basis points from the last comparable auction in June. The yield on 3-month bills rose to 1.081 percent from 0.766 percent in a previous auction in August.
"It is extremely important for Portugal to stick to meeting bailout goals because otherwise the country's risk premium will jump," said Filipe Silva, debt manager at Banco Carregosa in Porto.
The IGCP issued 750 million euros of 18-month bills and 500 million euros of 3-month bills at the auction. Demand outstripped the amount placed by 2.0 times on 18-month bills and 1.8 times on the shorter maturity, the IGCP said.
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