FILM-INDUSTRY lore has it that small-budget movies have a better chance of commercial success if they avoid clashing with the release of big-studio blockbusters and if they can generate lots of initial audience interest. A similar principle applies to small and indebted countries that need to raise a lot of money in a crowded bond market. A successful first auction of the year reassures investors; and early fund-raising is advised to avoid the rush of bigger countries to the market.

The buzz about Portugal's first bond auction of the year, on January 12th, had been so bad that even a sale at steep interest rates could be hailed as a triumph. Portugal met its target of €1.25 billion ($1.62 billion) by selling bonds maturing in 2014 and 2020. Both offerings were oversubscribed. Fernando Teixeira dos Santos, the finance minister, spoke afterwards with the relief of a director whose new film had opened well. “The success of today's issue shows that Portugal has the necessary conditions to finance itself in the market at prices that are not only acceptable, but favourable in the current climate,” he gushed. About 80% of the bonds were bought by foreign investors, he said, putting paid to suspicion that the issues had been sold to local banks.

But Portugal paid dearly for its success: the yield on the June 2020 bond was a whopping 6.7%. Granted, that was lower than the 7% at which ten-year bonds had traded earlier in the week (see chart 1), before reports of heavy purchases by the European Central Bank (ECB) pushed the yield down. But it is unsustainable for a country whose public debt is high and rising. Unless its borrowing costs plummet, Portugal will eventually have to seek rescue funds from its euro-zone partners and the IMF, as Greece and Ireland have already been obliged to do.

Portugal insists it does not share those countries' weaknesses, even if it too is small, sits at the fringe of the euro zone and has rickety public finances. Greece's main sin was fiscal laxity, Ireland's an almighty property binge. Both countries enjoyed fast GDP growth when credit was cheap. Portugal was different. It had a brief growth spurt in the run-up to joining the euro in 1999, as its borrowing costs fell. Its main frailty has been a steady loss of wage competitiveness, which began in the 1990s. This is reflected in a stubbornly large current-account deficit and a lost decade for the economy (see chart 2). Feeble GDP growth has made it hard to keep public finances on track. The budget deficit has averaged 4.6% of GDP in the past decade.

The country has also had some bad luck. In the 1990s the Uruguay round of world trade talks lowered tariffs on cheap textile imports from Asia. That hurt Portugal, then the European Union's sweatshop. China's entry to the World Trade Organisation in 2001 put further pressure on Portuguese firms. Attempts to move up the export value chain have been frustrated. A big Volkswagen car factory that opened near Lisbon in 1995 is said to be one of the company's most productive. But the expansion of the EU in 2004 diverted that sort of foreign direct investment away from Portugal towards eastern countries closer to Europe's industrial heartland.

All the while a steady inflow of cheap credit has pushed the country's net foreign debts to more than 100% of GDP. Much of the foreign borrowing is funnelled through Portugal's banks, whose credit lines depend on the standing of the state. The banks have been all but frozen out of capital markets since Portugal's sovereign debt was downgraded last spring, and are now heavily reliant on the ECB.

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The national central bank has said that Portugal's banks are “resilient and well capitalised”. Even so, there is a nagging fear that a country that has seen such huge capital inflows may not have used all the money wisely. One source of concern is Portugal's fetish for infrastructure. Urban rail systems have been built. New toll roads and ports were deemed necessary to address a weakness in the economy—its distance from Europe's main markets. Low rates of traffic suggest that some of these projects are unprofitable.

Some local analysts believe radical economic surgery to put exporters first is needed, so that Portugal can service its overseas debts. That would require a faster relaxation of stringent rules on hiring and firing, as well as dismantling of the sector-wide pay deals that keep labour costs high. It would also mean deregulation of service industries, whose elevated charges raise exporters' costs. The government has made some reforms but at a leisurely pace.

Modest achievements are talked up. José Sócrates, the prime minister, said this week that Portugal's 2010 budget deficit would fall “clearly below” the government's target of 7.3% of GDP. Portugal was one of the few EU countries to cut its deficit by more than two percentage points in 2010, he said. Yet revenues booked from the transfer of Portugal Telecom's pension funds to the state explain much of the improvement. The dilatory pace of fiscal consolidation is unlikely to assuage investors for long. The auction's success may offer only temporary respite. Investors in the euro zone's bond markets have seen the film before.