China is ready to buy 4-5 billion euros (US$5.3-$6.6 billion) of Portuguese sovereign debt to help the country ward off pressure in debt markets, the Jornal de Negocios business daily reported yesterday. The paper said, without citing any sources, that a deal reached between the two governments will lead to China buying Portuguese debt in auctions or in the secondary markets during the first quarter of 2011. China's central bank declined to comment on the report, while Portuguese government officials were not immediately available for comment.
It is unclear whether China's government would be prepared to take on so much fresh exposure to Portugal in such a short space of time, given that Beijing has faced domestic political pressure to invest the country's foreign reserves more carefully. Chinese investment funds suffered some large, high-profile losses during the global financial crisis. The euro rose to the day's high versus the dollar on Wednesday on the back of the report, climbing around 30 pips to a session high of US$1.3168 according to Reuters data.
However, "the report is unsourced so although it's providing a bit of support, clients certainly aren't putting much weight on it," said one trader. Portugal has moved into the eye of the storm in the euro zone's debt crisis, with borrowing costs spiking as investors grew concerned it would be next in line to seek an international bailout after Ireland and Greece. Despite the report, the premium investors demand to hold Portuguese 10-year bonds rather than safer German Bunds was still seven basis points from Tuesday's settlement levels to 378 bps.
Last month the spread hit a euro lifetime record of more than 481 bps but has narrowed thanks to bond buying by the European Central Bank. Portugal has completed its debt issuance program for 2010, and according to the IGCP debt agency, its next bond redemption is due in April, when it has to repay 4.5 billion euros. In total, Lisbon has to repay 9.5 billion euros in bonds next year.
The 2011 budget puts next year's net financing needs at 10.75 billion euros. The IGCP has not yet announced the issuance program for next year. Finance Minister Fernando Teixeira dos Santos met Chinese Finance Minister Xie Xuren and the head of the People's Bank of China during a visit to the country last week. (Reuters)