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By Grant de Graf
So, everyone is breathing a sigh of relief that the Portuguese bond auction went smoothly and that the average yield for the long term bonds was below the anticipated rate. Of course what players are ignoring is that the buyers of the bonds were in fact the EU, fronted by major investment banks. No harm done. This was the correct and optimal approach. It is in everyone's interest that the EU participate in providing greater stability through market instruments, rather than formulating a side deal, which would have merely served to increase speculation and uncertainty. Naysayers continue to talk Portugal into resorting to a bailout, however a bailout appears to be far from certain. Portugal recently closed on a €1.1 billion private placement with China. Additionally, Portuguese Prime Minister Jose Socrates has indicated that he will resist an EU bailout.
Pundits are suggesting that the 6.716% avereage yield achieved at the auction is too high to facilitate strong growth levels in GDP, which the Bank of Portugal are suggesting for 2012. This is not necessarily a deal breaker, as world economies have historically succeeded in achieving high growth, in a high interest rate environment.
The focus will really be on how Portugal can achieve economic rejuvenation, given the softening of global demand. If the country is to achieve its projected levels of growth, then essentially it will need an export lead recovery. This will be very difficult to achieve if the country is tied to the Euro and if it does not enjoy a competitive advantage, which under normal conditions could have been achieved through the devaluation of its currency through the market mechanism.