Portugal will not be able to secure a bridging loan from its European partners without agreeing first to an international debt bailout under strict conditions, the European Commission said Tuesday.
The warning came after Portuguese business daily Jornal de Negocios reported that the country’s biggest banks had decided to stop buying government bonds even as Lisbon has to raise fresh funds to pay back nine billion euros ($12.7 billion) of state debt by mid-June.
The newspaper said the “over-exposed” banks decided during talks on Monday to press outgoing premier Jose Socrates’ caretaker government to ask the EU executive for a “bridging loan” of 15 billion euros ahead of elections on June 5.
However, a spokesman for EU economic and monetary affairs commissioner Olli Rehn told AFP that such a plan would go “above and beyond what was decided by eurozone member states and therefore is not on the table.”
Pressure mounted on Portugal after Moody’s Investors Service on Tuesday downgraded the country’s ratings by a notch from A3 to Baa1 and warned that it expected Lisbon to have to seek outside help to resolve its debt problems.
The downgrade was just the latest by credit rating agencies since the Portuguese parliament last month rejected the government’s latest austerity package — forcing Socrates’ resignation.
Markets increasingly believe that Lisbon will be forced to seek outside help, like fellow eurozone strugglers Greece and Ireland last year, and are demanding ever higher rates of return to provide fresh funds to cover its debt.
On Monday, the yield on Portugal’s benchmark 10-year bonds rose for a 10th straight session to record highs near 8.5 percent, an unsustainable level to have to pay for long-term funding.
Rehn’s spokesman stressed that aid under either the eurozone’s European Financial Stability Fund or a smaller fund worth 60 billion euros run by the commission would each require strict programmes of “economic adjustment” to be implemented in exchange for loans.
Socrates insisted again Monday that seeking outside help was the very last option because it would involve even tougher austerity measures than his government had introduced.