Portugal Unveils Tough Budget, Spanish Yields Drop

Arthi Gupta
16 Oct, 2012
New York City

The European indexes gained more than 1% after German sentiment improved and expectations of a Spanish bailout request increased. S&P cut ratings on 11 Spanish banks and borrowing costs fell at a bond auction today. Portugal unveiled a tough budget for 2013.

[R]3:00 PM Frankfurt – The European indexes gained more than 1% after German sentiment improved and expectations of a Spanish bailout request increased. S&P cut ratings on 11 Spanish banks and borrowing costs fell at a bond auction today. Portugal unveiled a tough budget for 2013.[/R]

European indexes after the German economic sentiment increased to -11.5 in October from -18.2 in September.

Investors focus on Spain after reports hinted that the country may request a formal bailout soon. Spanish borrowing costs declined in an auction of 12- and 18-month treasury bills despite a downgrade of 11 Spanish banks.

Portugal unveiled a tough budget for 2013 amidst widespread protests aimed at increasing tax hikes and spending cuts.

European leaders are scheduled to meet in Brussels on Thursday to discuss Greece and Spain.

S&P Downgrades Spanish Banks]

Standard & Poor''s cut the long-term counterparty credit ratings on 11 Spanish banks and short-term counterparty credit ratings on four and placing the ratings for six banks on creditwatch negative.

S&P lowered sovereign ratings on Spain to ''BBB-/A-3'' from ''BBB+/A-2''.

S&P also assigned negative outlooks to the long-term debt ratings on three banks - Banco Santander S.A., Banco Bilbao Vizcaya Argentaria S.A., and Barclays Bank S.A.

Spain is expected to formally request a bailout to satisfy the conditions of the European Central Bank to start buying its bonds, according to media reports quoting senior officials at the Spanish government.

However, the official was quoted as saying that Spain may not need money from the European Stability Mechanism.

Reuters reported that Spain is most likely to request a bailout in November.

If such a request is made, the European authorities are likely to respond with a bigger package including a revised loan program for Greece and a bailout for Cyprus, the news agency said quoting euro zone officials.

Portugal Unveils 2013 Budget

The Portuguese Finance Minister Vitor Gaspar outlined details from the 2013 budget that includes tax hikes and spending cuts.

The Finance Minister Gaspar said the average income tax rise would increase to 13.2% next year from 9.8% this year and capital gains tax would increase to 28% from 25%.

Other measures include reducing the number of income-tax brackets to five from eight and imposing an extraordinary additional surcharge of 4% on income. There will also be a special ""social solidarity"" tax of 2.5% on income.

The finance minister announced spending cuts worth €2.7 billion for 2013, that includes laying off 2% of the country''s 600,000 public sector employees as well as freezing of promotions and cut in other benefits.

These new measures are estimated to fetch the government €4.3 billion in revenue.

The Portuguese economy is forecast to shrink 1% and the unemployment rate is expected to climb to 16.4% in 2013. However, the government expects to reduce the budget deficit to 4.5% of gross domestic product in 2013 and to 2.5% in 2014 from 5% of GDP this year.

Portugal was granted a €78 billion bailout by the troika last year.

In Paris trading, the CAC-40 Index rose 42.77 or 1.3% to 3,463.05 and in Frankfurt the DAX Index edged higher 93.08 or 1.3% to 7,354.28.

The yields on Spain’s benchmark 10-year fell five basis points to 5.77%. Italian 10-year yields fell six basis points to 4.93%.

Spanish Bond Auction

The Spanish Treasury raised €4.863 billion from the issue of 12- and 18-month treasury bills, exceeding the target range of €3.5 billion-€4.5 billion.

The average yield on the 12-month bills fell slightly to 2.823% from 2.835% at the prior auction on September 18. The bid-to-cover ratio rose to 2.7 from 2.

The average yield on 18-month bills dropped to 3.022% from 3.072% on September 18. The bid-to-cover ratio was 3 times compared to 3.6 last time.

Hillenbrand to Acquire Coperion Capital

U.S.-based Hillenbrand, Inc. agreed to acquire privately held Coperion Capital GmbH, a portfolio company of Deutsche Beteiligungs AG, for €408 million or $530 million at current exchange rates, which includes the assumption of an estimated €76 million of net debt and €100 million pension liability.

The transaction is expected to close in December or January.