Foreigners Shun Europe’s Bonds, and Debt Piles Up

ATHENS — Greece. Ireland. And now, it seems, Portugal.

While the circumstances that have driven these debt-ridden members of the euro zone to the brink differ, they share one common characteristic: All three countries aggressively tapped their domestic banking systems for more debt long after they had been shut out of international bond markets.

With its 10-year debt trading close to the historic high of 7 percent reached last week, Portugal will try Wednesday to sustain what many have come to see as nothing more than a form of bond market charades when it attempts to raise up to €1.25 billion, or $1.62 billion, in long-term financing — debt that is expected to come largely from the country’s already depleted banking system.

For Portugal, as it was for Greece and Ireland before their bailouts, borrowing at such high rates from lower-quality lenders may demonstrate its economic sovereignty. But to an increasingly skeptical marketplace, borrowing on such terms reflects nothing more than the country’s unwillingness to accept the rude reality of its fiscal condition.

As a result, the Portuguese banking system takes on more debt, making it harder to restructure and thus requiring the government in Lisbon to impose more pain on its citizens, a dynamic that is now playing out in Greece.

“Eighty percent of Portugal’s debt stock is held by foreigners,” said Jonathan Tepper, an analyst at Variant Perception a research firm in London. “But the flow, now, is being financed domestically.”

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