LISBON: Debt-burdened Portugal had to pay sharply higher returns Friday to raise fresh funds as Fitch slashed its ratings on concerns upcoming polls will make life even more difficult for the country.
The national debt agency said it raised 1.645 billion euros ($2.33 billion) in one-year bonds at an average yield -- the return paid to buyers -- of 5.793 percent, up from 4.331 percent at a similar sale on March 16.
Although analysts said they had expected Lisbon to have to pay even more, anything above 5.0 percent on short-term debt is very high, with the markets betting Portugal will need external help to overcome its debt problems.
Rates on benchmark Portuguese 10-year bonds have jumped above 8.0 percent, an unsustainable level for the long-term, since parliament rejected the government's latest austerity package last week, forcing new polls and a series of sharp rating downgrades.
They rose to 8.409 percent late on Friday after Fitch downgraded Portugal's rating, from 8.304 percent on Thursday, a new record high for Lisbon's 10-year bonds since the country joined the eurozone.
Fitch Ratings said it slashed its credit rating on Portugal by three notches to BBB- because with the election campaign underway, the country would be less likely to secure outside help, after fellow struggling eurozone members Greece and Ireland were bailed out last year.
"The severity of the downgrade by three notches mainly reflects Fitch's concern that timely external support is much less likely in the near term following (Thursday's) announcement of general elections to take place on 5 June," said Douglas Renwick, director in Fitch's Sovereign Ratings Group.
"The agency views external support as necessary to bolster the credibility of Portugal's fiscal consolidation and economic reform effort, as well as secure its financing position," he added.
Finance Minister Fernando Teixeira dos Santos said Thursday that the outgoing government would have no authority to negotiate a bailout deal which he insisted again is not needed.
"I do not think that bankruptcy is a serious risk," Teixeira dos Santos told private TVI television.
The government "must secure the means for the country to fulfill its obligations," he said, adding without elaboration that "we must be more creative."
Fitch's downgrade, just the latest in a series of damaging moves by the top three ratings agencies, makes it more difficult for Lisbon to raise fresh funds at acceptable cost to cover its debt obligations.
Figures Thursday showed that Portugal chalked up a 2010 deficit equal to 8.6 percent of Gross Domestic Product, way above its target of 7.3 percent and making it even more unlikely it will meet the 2011 goal of 4.6 percent.
The EU public deficit limit is 3.0 percent.
Fitch said the upward revisions of the deficit figures "further weakened Portugal's fiscal profile and underscores the magnitude of the fiscal consolidation challenge facing the new government."
It said the elections mean that further fiscal consolidation will likely not be implemented until the third quarter of the year, entailing a "significant risk" this year's 4.6 percent deficit target will not be met.
Given the bad news backdrop, analysts said Friday's exercise was a relative success but the rates paid, if less than expected, were still too high.
"You could say it was a success ... the rate was less than what the market was wanting of close to six percent ... and 6.5 percent (on Thursday)," said Felipe Silva, bond strategist at Banco Carregosa.
"However, that is still too high for such short-term paper," Silva said, adding: "Portugal has gained a little time but outside help remains virtually inevitable."
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