Portugal’s borrowing costs soar as fears of bailout grow

Portugal’s borrowing costs hit record highs on Thursday after it missed key targets on balancing its strained public finances, stoking fears an international debt rescue may be the only way out.

Official figures showed the country’s public deficit stood at 8.6 percent of Gross Domestic Product last year, well above the 7.3 percent government objective and way above the EU ceiling of 3.0 percent.

President Anibal Cavaco Silva meanwhile was to hold talks that could lead to the calling of new elections to replace the government, which collapsed last week after parliament refused to endorse another round of tough austerity cuts.

The latest deficit announcement sent the yield on Portuguese 10-year bonds soaring to 8.317 percent by mid-afternoon on Thursday, up from 8.0 percent at Wednesday’s close, which was already the highest level since the country adopted the euro currency.

The rate on five-year bonds also hit a record high of 9.464 percent, up from 8.897 percent on Wednesday.

Portugal has been embroiled in a political and economic crisis since Prime Minister Jose Socrates quit on March 24 after failing to get support for the latest series of spending cuts to trim the deficit. President Silva however has yet to accept his resignation.

Standard & Poor’s on Tuesday downgraded its credit rating on Portugal by another notch to BBB- after already slashing the rating last week on fears Lisbon could follow Greece and Ireland and seek a bailout.

Finance Minister Fernando Teixeira dos Santos meanwhile said Thursday that the caretaker government does not have the right to negotiate an international rescue.

“This government does not have the legitimacy, nor the conditions to negotiate in this way,” the minister told a press conference.

He insisted, however, that the deficit target for this year was “not in danger.

“The government is considering all the means to assure the country’s finances,” the finance minister said.

Socrates’ government had pledged to bring down the deficit to 4.6 percent in 2011 through a series of hugely unpopular spending cuts and tax hikes.

Portugal’s debt agency, the IGCP, announced Thursday it intended to raise between 750 million and one billion euros in treasury 7- and 10-month bonds on Wednesday.

Over the whole of the second quarter, it hopes to raise 7.0 billion euros in short-term funds to help must repay 9.0 billion euros in debt by mid-June.

President Silva, who spoke to the political parties last week, was to meet later Thursday with the State Council, an advisory body composed of the highest state officials who must decide on the dissolution of parliament.

After the meeting, described by the press as a “last formality” prior to calling new elections, the president may announce the date for the polls.

If parliament is dissolved, the government would be limited to managing daily affairs which will leave the country vulnerable to increasing pressure from the financial markets.

On Tuesday, Socrates said he was “very determined” to avoid the kind of EU-IMF bailout which fellow eurozone members Ireland and Greece sought last year to prevent a debt default.

Portugal’s leading daily Publico Thursday said the pressure on Lisbon “is similar to that on Greece and Ireland at the time when they were forced to seek aid.”

The country must now seek “private investments, direct borrowing from banks or call on investors in other countries” such as China or Brazil to help.