Portugal, Ireland ease debt repayment fears with pre-funding

Wed Jul 2, 2014 4:49am EDT

* Portugal, Ireland pre-fund lumpy upcoming repayments

* Portugal sells first dollar bond since 2010

* Ireland offers buyback and switch

By John Geddie

LONDON, July 2 (Reuters) - Portugal and Ireland, two of Europe's most indebted countries, are aiming to soothe investor nerves by funding near-term debt repayments ahead of schedule on Wednesday.

Portugal will sell its first dollar bond in more four years as it sets about raising funding for next year. Ireland, meanwhile, is offering investors the chance to swap a bond that matures in 2016 for longer-dated debt.

"Both deals reflect the ease with which euro sovereigns are funding and a reduction in credit risk," said Anton Heese, co-head of European rates strategy at Morgan Stanley.

"It is prudent debt management that you try and term out your debt when you have the opportunity."

Around 37 percent of Portugal's 138 billion euros of debt falls due by the end of 2016, while around 23 percent of Ireland's 144 billion euros also matures during that period, according to Thomson Reuters data.

Both countries had to be bailed out just over three years ago as investors, fearing neither would be able to service their massive debt loads, turned their backs.

But even though both countries' debts now stand at euro era highs of over 120 percent of economic output, a commitment by the European Central Bank to do "whatever it takes" to save the euro zone, and hard-won bailout exits earlier this year, have seen investors return.

Having already raised all its funding needs for 2014, Portugal is selling a new 10-year dollar bond on Wednesday - its first in the currency since March 2010.

The deal has already attracted over $2 billion of demand, and is set to price at around 265 basis points over the 10-year U.S. Treasury, which equates to a yield of around 5.2 percent at current market rates.

Commerzbank said on Wednesday that the deal's timing was rather "delicate" given an investigation into three holding companies of the country's biggest bank, Banco Espirito Santo.

Portugal's 10-year bond yields were unchanged on Wednesday at 3.61 percent, calming after day's of volatile trading as investors appeared to put trust in the government's conclusion that there was no threat to financial stability or public accounts from the probe.

Ireland, also fully funded for this year, will buy back debt maturing in April 2016 and offer investors the chance to exchange their holdings for a 2023 bond, the country's debt agency said on Wednesday.

Other peripheral euro zone countries have also used bond switches to trim future funding needs, most recently Spain, which last month swapped expensive debt issued at the height of the euro zone crisis for a new 10-year bond.

The results of Ireland's transaction will be announced after midday (1100 GMT). Irish 10-year yields were unchanged on Wednesday at 2.37 percent.

Other peripheral euro zone bond markets were also flat. (Editing by Alison Williams)

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