PORTUGAL’S INCREASINGLY desperate attempts to avert an EU-IMF bailout took a turn for the worse as credit rating agency Moody’s downgraded its debt and local banks signalled their unwillingness to buy government and state-company debt.
As doubts intensify about its prospects of surviving much longer without an international intervention, diplomatic and official sources said the country’s election on June 5th remains a major complicating factor.
Amid reports that tentative bailout talks are already under way, European sources dismissed claims by senior Portuguese bankers that the country should seek emergency “bridging” financing from its EU partners or the IMF.
The chief of major Portuguese lender Millennium, Carlos Santos Ferreira, said it was “indispensable the country seeks a short-term loan” of at least €10 billion.
However, European sources said the only option for aid was for the country to seek assistance under the existing EU-IMF scheme with a commitment to a strict recovery programme being a condition of such assistance.
Caretaker premier José Socrates is still publicly resisting pressure to follow Ireland and Greece into such a rescue even though bond yields remain above 9 per cent for 10-year money, far above the level considered sustainable by even his own ministers.
According to senior euro zone sources, Lisbon’s initiation of a series of short-term bond auctions was seen as a last-ditch push to put money aside for looming bond redemptions without applying for aid.
The country seeks to raise €1 billion in six-month and one-year bonds today, an auction which follows the sale last week of €1.6 billion in one-year paper at extraordinarily high interest rates.
“I think pressure is becoming quite high from the markets,” said a diplomat who is closely following the country’s difficulties. “When you look at the spreads, they’re breaking records one day after another. It’s not good.”
While EU finance ministers are set to review the situation at their informal meeting in Budapest on Friday and Saturday, a European official said it was clear that options open to a caretaker government were very limited.
“The political crisis in Portugal hasn’t made life any easier. Portugal already had a rather difficult situation as it was,” said European Commission president José Manuel Barroso, himself a former prime minister of Portugal.
“We in the commission must respect national democracy and decisions taken by national parliaments,” he told the European Parliament in Strasbourg.
“We hope that Portugal will come up with a better solution and the commission will try to help Portugal in finding the most appropriate solutions – and this in the framework of the commitments entered into by Portugal.”
As the country’s banks withhold their support for new debt issues, Portugal’s plight is complicated by the fact that it faces €9 billion in bond redemptions between now and mid-June.
Some of its euro zone partners believe it can continue to fund itself for some time to come with very short-term debt, albeit at penal interest rates. Others, however, say the country may have no choice but to initiate an aid application within days.
Local analysts say legal avenues are open to the country’s president, Anibal Cavaco Silva, to facilitate an aid application by the caretaker government if required.
The situation was compounded yesterday when rating agents at Moody’s cut the country’s sovereign debt by one notch to BAA1, its second downgrade in three weeks.
The downgrade followed similar interventions by Standard Poor’s and Fitch after Mr Socrates’ abrupt resignation last month, when parliament spurned his latest austerity plan. Polls suggest he will lose the election to the opposition Social Democrats, who are led by Pedro Passos Coelho.
Moody’s said it expected the election winner to tap the European Financial Stability Facility bailout fund with “urgency”, and that Portugal will be able to receive support from other euro zone countries before then if necessary. “The government’s current cost of funding is nearing a level that is unsustainable,” Moody’s said.
“It is very unlikely that the long-term debt markets will reopen to the Portuguese government or the Portuguese banks to any meaningful extent until the government is able to take action to dispel doubts over its commitment and ability to implement the fiscal programme.”
