Portugal's borrowing costs jump

Portugal's borrowing costs jump: "

Buyers at today's auction of government debt demanded a much higher rate of return – 5.3% from 4.8% two weeks ago

Portugal saw its cost of borrowing jump significantly this morning as it paid the price for the ongoing eurozone debt crisis.

Although there was relief that Portugal found buyers for the €500m (£418m) of 12-month bonds on the table, buyers at this morning's auction demanded a much higher rate of return. The debt was sold at an average yield – or effective interest rate – of 5.281%, up from 4.813% at a similar auction two weeks ago.

The auction was held just hours after Standard & Poor's ratcheted up the pressure on the Lisbon government by warning that it may cut Portugal's credit rating. Analysts had predicted that Portugal would have to pay a steep premium to find buyers for its debt today. Traders were very unwilling yesterday to buy the bonds of peripheral eurozone members, reflecting fears that Portugal, Spain or even Italy could need to tap the EU's rescue funds.

Last night, S&P announced that it had put Portugal's debt on negative credit watch, and may downgrade its A- rating in three months. The agency said there were "increased risks" to the Portuguese government's creditworthiness, and warned that its austerity cutbacks would harm economic growth.

"In 2011, Portugal's minority government is set to implement an ambitious fiscal austerity programme with an emphasis on reducing expenditures. However, we see the government as having made little progress on any growth-enhancing reforms to offset the fiscal drag from these scheduled 2011 budgetary cuts," said S&P's credit analyst Frank Gill.

'As a consequence of the Portuguese economy's structural rigidities and the volatile external conditions, we project that the economy will contract by at least 2% in 2011 in real terms.'

Portugal's central bank warned yesterday that the country's financial sector faced 'intolerable' risk unless the government's planned austerity measures were implemented. Last week, a general strike shut down much of the country's transport network.

The eurozone's weaker members were given some early respite from the financial markets this morning, after Jean-Claude Trichet – head of the European Central Bank – hinted at closer European harmonisation to address the crisis.

The yield, or rate of return demanded by investors, on Portuguese 10-year bonds fell slightly to 6.90% this morning, from 6.93% yesterday. The spread between the yields on Italian and Spanish bonds and their German equivalent, which hit an all-time high yesterday, also fell this morning.

It also emerged last night that the US is sending a special envoy to Europe to discuss the crisis.

Lael Brainard, the undersecretary for international affairs, will hold meetings with senior government officials in Madrid, Berlin and Paris over the next few days to 'discuss economic developments in Europe as well as our longer-term work to advance our shared agenda on strong and sustainable global growth,' the Treasury said in a statement yesterday."