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Originally published Wednesday, February 20, 2013 at 4:21 AM

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Portugal raises $2B in debt sale, cuts forecasts

Portugal raised (EURO)1.5 billion ($2 billion) in a debt sale at sharply lower rates Wednesday as the bailed-out country continues to benefit from improving market confidence, despite forecasts its recession will deepen.

Associated Press

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LISBON, Portugal —

Portugal raised (EURO)1.5 billion ($2 billion) in a debt sale at sharply lower rates Wednesday as the bailed-out country continues to benefit from improving market confidence, despite forecasts its recession will deepen.

Finance Minister Vitor Gaspar said Wednesday the government expects an economic contraction this year of 2 percent - double its earlier prediction. It will be Portugal's third straight year of recession as austerity measures including steep tax hikes and welfare cuts are blamed for a crunch on spending and investment, as well as an unemployment rate that has hit a record 16.9 percent.

Portugal needed a (EURO)78 billion bailout in 2011 when a decade of average growth below 1 percent and mounting debts pushed it close to bankruptcy. Investor faith in Portugal has returned in recent months - a trend reflected in falling interest rates on its debt - as the European Central Bank has indicated it is willing to help eurozone countries that, like Portugal, are abiding by debt-reduction programs. Portugal hopes to be able to finance itself without help by the end of the year.

In the third quarter of last year, the latest figure available, the deficit stood at 3.2 percent of annual GDP. In 2010, it was 10.1 percent.

Given Portugal's recent record on slashing debt, Gaspar told a parliamentary committee hearing it was "reasonable" to expect that its bailout lenders - the so-called troika of the ECB, the European Commission and the International Monetary Fund - will grant Portugal an extra year to meet its debt targets.

He did not elaborate but Portugal is currently aiming for a deficit of 2.5 percent of gross domestic product in 2014.

A longer time span to reduce the deficit would potentially allow the government time to ease off on its contested cuts and tax hikes.

Gaspar said the government's priority this year will be to encourage investment, with possible policies due to be discussed with troika officials next week when they begin their regular quarterly assessment of the country's progress.

The government debt agency, meanwhile, said it sold (EURO)1.155 billion in 12-month debt at a rate of 1.277 percent, down from 1.61 percent last month. It said there was market demand for more than double the amount offered.

It also collected (EURO)345 million from a 3-month T-bill sale, with the yield slightly up at 0.737 percent compared with 0.67 percent in January. Demand was almost four times higher than the amount available.

"Investors know that if anything goes wrong the ECB will be vigilant and offer its help, and that has greatly reduced the risk factor of Portuguese debt in recent month," said Filipe Silva, debt manager of Lisbon-based financial group Banco Carregosa.

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