Portugal Heads for Short-Term Borrowing Test

(REUTERS) -- Portugal seeks to sell 1.5 billion euros ($1.9 billion) in treasury bills on Wednesday, in a test of its ability to raise short-term funds after a recent surge in its long-term bond rates have raised fears it may be forced to follow Greece and seek a new bailout.

The sell-off in Portuguese bonds in the past two weeks has sent yields and the cost of insuring the country's debts to record highs, adding to Lisbon's woes as it grinds through its worst economic crisis in decades and imposes sweeping austerity.

Its bond prices were up slightly in early trade on Wednesday, with the yield on 10-year bonds at 16.49 percent, below record highs of 17.40 percent reached on Monday.

These remain well over twice the level generally considered unsustainable, however.

Any sign that Lisbon can still raise short-term financing in markets would ease immediate concerns that it may need to extend terms or ask for more bailout money than its current 78 billion euro lifeline from the European Union and IMF.

Analysts said they expect the country to be able sell the full amount of 3- and 6-month bills, although yields may rise slightly from the last auction on January 18.

I think demand will remain strong as the country is issuing short-term debt, which is not very influenced by a rise in long-term yields, said Filipe Silva, debt manager at Banco Carregosa.

The full amount should be issued and even if the rates rise it won't be a big problem issuing all of it as has been done in the past.

On January 18 Portugal issued 2.5 billion euros in treasury bills, with the average yield on 3-month bills at 4.346 percent and 4.740 percent for 6-month bills.

I don't expect big changes from the last auction, said Rui Constantino, economist at Santander in Lisbon. It (the auction) may calm some nerves.

Concerns over Portugal have grown ever since Standard & Poor's downgraded its debt to 'junk' status earlier this month, putting it in the same category as only Greece in the euro zone.

That and the uncertainty surrounding Athens' efforts to restructure its debt has fuelled growing worries over Portugal, with some economists saying it could eventually have to restructure its debts as well.

But the government insists that it has no intention of extending or asking for a new bailout to top up the existing one, sticking to its strategy of meeting strict budget goals and reforming its economy to boost confidence.

Prime Minister Pedro Passos Coelho said late on Tuesday the country would meet the demands of its current bailout whatever the cost.

The austerity demanded by the bailout, including salary cuts for civil servants and across-the-board tax hikes, has already sent Portugal into its worst recession since the 1970s and left unemployment at its highest level in decades.

(Additional reporting by Patricia Rua and Sergio Goncalves. Editing by Jeremy Gaunt.)