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Political crisis pushes Portugal to brink of bailout

Published on 25/03/2011

Portugal faced intense market pressure Friday over its debt following the resignation of prime minister Jose Socrates and has been pushed to the brink of asking for a financial bailout, analysts said.

Two of the top three ratings agencies, New York-based Standard and Poor’s and London’s Fitch Ratings, on Thursday slashed their ratings on Portugal’s sovereign debt by two notches and warned further downgrades could be made soon.

Fitch downgraded Portugal’s long-term rating by two notches from A+ to A- while S&P cut its rating from A- to BBB, bringing Lisbon’s credit standing closer to ‘junk’ status.

Both said Socrates’ resignation on Wednesday after parliament rejected his latest package of austerity measures had heightened the risk that Portugal, one of the poorest members of the 17-member eurozone, would be unable to refinance its debt.

Fitch said the failure to pass the new austerity plan “and the ensuing policy uncertainty … therefore significantly increased the chances of Portugal requiring multilateral suppport in the near term, given its impaired ability to retain affordable market access.”

Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of eurozone finance ministers, said Thursday that should Portugal require assistance, aid of some 75 billion euros (almost $100 billion) would be “appropriate,” but only “under strict conditions.”

Greece and Ireland had to be bailed out by the EU and International Monetary Fund last year after they could no longer raise fresh funds in the money markets to cover maturing debt.

The ratings downgrades caused the already high interest rates which the Portugal must pay to investors to hit new record highs on Friday.

Portugal’s 10-year bond rate touched 7.78 percent, a record since the country adopted the common euro currency, and up from 7.557 percent at Thursday’s close. Rates above six percent are typically viewed as exorbitant in the bond market and anything above seven percent is unsustainable for long.

“The market is already treating Portuguese bonds as junk notes, so we should expect further downgrades to happen,” Alessandro Giansanti, strategist at ING bank in Amsterdam, said in a research note.

ING expects Portuguese bond rates will continue to rise until Lisbon taps the European Financial Stability Fund (EFSF), set up after Greece nearly defaulted in May 2010, he added.

Higher rates will make it even more difficult for Portugal to meet its financing requirements totaling 4.2 billion euros by April 15 and another 4.9 billion euros by June.

“The Portuguese finance minister will probably not be able to borrow these funds at acceptable conditions on the capital market,” Frankfurt-based Commerzbank said in a research note.

Socrates insisted Friday at an EU summit in Brussels that Portugal does not need a financial rescue.

His outgoing government has vowed to “do all it can” to avert a bailout.

In January, China bought one billion euros in Portuguese debt in a private placement and Lisbon has sought to carry out more such operations with nations with sounder finances in its effort to avoid a bailout.

A Chinese foreign ministry spokesman said Thursday the Beijing wants to “strengthen its ties” with Lisbon.

Brazilian President Dilma Rousseff will visit Portugal next week, which has led to media speculation that Lisbon might approach its fast-growing former colony for aid.

Daniel Gros, the director of the Centre for European Policy Studies, a Brussels-based think tank, said private placements would not solve Portugal’s woes.

“This is always the same story. Whenever a country is in difficulties some Chinese delegation comes and is supposed to provide billions. China did not save Greece, it will not save Portugal,” Gros said.

“The key problem is the banks which may run out of cash long before the government. This was also the case in Ireland,” he added.