THE PORTUGUESE government faces a potentially defining test today of its ability to avoid an EU-IMF rescue as it attempts to raise €1.25 billion in five- and 10-year bonds.
With Lisbon’s 10-year borrowing costs resolutely above the 7 per cent deemed in many EU capitals to be unsustainable, senior European sources acknowledged last night that the auction will be a crucial barometer of investor sentiment towards the country.
Following a series of negative signals from the Bank of Portugal about the country’s prospects, there was speculation last night in Brussels that Lisbon would have no choice but to seek external aid if the yield on the 10-year offering was significantly above 7 per cent.
The bond sale comes only days ahead of the first meeting this year of euro zone finance ministers, who next Monday will review Portugal’s position and discuss an expansion of lending capacity of the bailout fund.
Ahead of the first ECB governing council meeting of the year tomorrow, the effort to defend the single currency received a boost when Japan signalled its intention to follow China’s purchase of euro zone bonds.
However, former ECB chief economist Otmar Issing warned that failure to use the crisis to enforce Europe’s budget rules more strictly could lead to the eventual break-up of economic and monetary union.
In a blunt assessment of the risk to the euro, Mr Issing warned in the bulletin of the Official Monetary and Financial Institutions Forum that fiscal transfers to weak countries from strong member states would stoke political anger.
“With the failure to make sovereign states’ fiscal policies consistent with the conditions for the single currency area, policymakers not only have weakened the functioning of monetary union, but have also called into question its very survival,” he said.
As speculation intensified yesterday that Portugal may soon be forced to seek a bailout, Portuguese prime minister José Sócrates hastily convened a press conference to declare he had no intention of seeking funding.
“The Portuguese government and Portugal will not ask for any aid or financial assistance for the simple reason that it is not necessary,” he told reporters.
His confidence, however, appeared at odds with public statements from the Portuguese central bank. The bank predicted the economy will contract by some 1.3 per cent this year, greater than government forecasts.
It also said Portuguese banks would continue to rely on exceptional ECB funding for liquidity this year and next due to problems accessing the interbank market.
In addition, a member of the central bank’s board called for an early application for international aid. “It would be easier if we had foreign help because this would mean that the adjustment would not be so abrupt, but if we do it alone, for the markets to believe in it, it has to be brutal,” Teodora Cardoso said.
With the ECB again reported to be in the secondary market for Portuguese bonds, 10-year yields eased slightly but did not fall below the 7 per cent threshold.
