Portugal to sell bonds to fund budget gap

Portugal is selling bonds in dollars for the first time since November as part of a plan to issue 25 percent more debt this year to fund its widening budget deficit.

The nation is marketing $1 billion of five-year bonds that may be priced to yield about 100 basis points more than the benchmark mid-swap rate, according to a banker involved in the deal who declined to be identified before the sale is completed.

Portugal plans to sell about 20 billion euros ($27 billion) of bonds in 2010, the government said last month, up from 16 billion euros in 2009. The government, whose bonds tumbled as Greece’s fiscal crisis increased scrutiny of European economies, has pledged to reduce its budget gap of 9.3 percent of gross domestic product by more than half in three years.

“It’s not surprising that Portugal is coming to the market now as many European sovereigns tend to borrow more in the first half of the year,” said Ciaran O’Hagan, a fixed-income strategist at Societe Generale in Paris. “Portugal will likely achieve a better rate of funding in dollars so both the government and taxpayers are getting a better deal.”

The cost of insuring Portugal’s debt from default rose as the country sought to issue more bonds. Credit-default swaps on the nation climbed 3 basis points to a two-week high of 118, according to CMA DataVision prices.

Credit-default swaps are derivatives used to hedge against or speculate on countries’ or companies’ creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt commitments.

The proposed spread on the new bond issue gives an overall yield of 3.59 percent, according to data compiled by Bloomberg. That compares with the 3.30 percent yield offered by Portugal’s benchmark five-year issue in euros.

Portugal last sold dollar debt in November when it raised $100 million from floating-rate notes due in 2014, Bloomberg data show. The country has $453 million of dollar-denominated securities outstanding, the data show.

Deutsche Bank, Goldman Sachs Group, HSBC Holdings and Morgan Stanley are managing the sale of bonds, the banker familiar with the terms said.