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Portugal, Ireland build cash buffer, ease debt repayment fears
July 2, 2014 / 11:01 AM / 3 years ago

Portugal, Ireland build cash buffer, ease debt repayment fears

* Portugal, Ireland pre-fund lumpy upcoming repayments

* Portugal sells first dollar bond since 2010

* Ireland offers buyback and switch

* Some strategists say no rush with low rates (Adds fresh comment, updates prices)

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 than 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 10-year debt.

“As a precautionary measure it makes a lot of sense,” said Luca Jellinek, European head of fixed income at Credit Agricole.

“After the experience of the last few years, we know how quickly the market can become less liquid or less favourable.”

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.

“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.

Portugal’s borrowing costs over 10-years hit the lowest levels since 2006 last month, while Ireland’s dipped to record lows, after the ECB announced a raft of measures to shore up weak economic growth and counter the threat of deflation.

A Reuters poll of economists pointed to a one-in-three chance of the ECB launching an asset purchase programme within 12 months, with the French prime minister adding to calls for this so-called quantitative easing on Wednesday.

PLANNING AHEAD

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.

While the money raised will help offset some of Portugal’s upcoming repayments, Citi’s global head of rates strategy Alessandro Tentori said the country appeared in no desperate rush to lock in low rates that will likely remain for some time.

“Markets levels are what they are and they have to rebuild a curve and come back to the market,” said Tentori.

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, has set terms on a debt buy back of April 2016 bonds and an exchange offer 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 1 bps wider on Wednesday at 2.37 percent. (Editing by Toby Chopra)

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