Moody’s downgrades Portugal’s credit rating for a second time
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Moody's downgraded Portugal's credit rating for the second time in less than a month on Tuesday. Portuguese newspaper Jornal de Negocios reported that the heads of the country’s biggest bank has urged the government to seek a hefty short-term loan.
REUTERS - Portugal's credit rating was downgraded again on Tuesday and its biggest banks reportedly threatened to stop buying government debt, urging the caretaker administration to seek a short-term loan during pre-election limbo.
Business daily Jornal de Negocios said the heads of the country's biggest banks met the governor of the Bank of Portugal on Monday, telling him that the country should secure short-term financing to soothe concerns until a June 5 general election.
If true, a bond-buying strike from Portugal's major domestic buyers could shut it out of financing from the markets in the way Greece and Ireland were before they were bailed out.
Moody's cut Portugal's sovereign debt by one notch, saying it believed the caretaker government would need to seek urgent financing support from the European Union, before a full-blown bailout is requested by a new government.
The agency said it could cut Portugal's rating further before its next review in July if it saw that short-term support was not available from its euro zone partners.
Standard & Poor's and Fitch have already downgraded Portugal since the minority Socialist government resigned last month after parliament rejected an austerity package.
Moody's lead analyst for Portugal, Anthony Thomas, told Reuters the caretaker government did not cite any short-term loan as part of its contingency plans for financing.
"The government has not mentioned anything like that to us," he said, adding that any loan could come from European institutions rather than the International Monetary Fund as local media have suggested.
A European Commission spokesman said the euro zone's emergency lending facilities extend loans to countries that ask for help in an established procedure that involves strict conditionality. A source said no special "short-term loan" outside a negotiated financial aid programme was possible.
A spokesman at Portugal's central bank would not comment on the Jornal story, which reported that Portuguese banks were no longer in a position to buy government debt after purchasing large quantities of bonds in the past year.
Spokesmen from Millennium bcp and Banco Espirito Santo declined to comment.
But Carlos Santos Ferreira, head of Millennium bcp, Portugal's biggest private bank, said in a television interview late on Monday that it was "indispensable that the country seeks a short-term loan", of at least 10 billion euros.
Andre Rodrigues, a banking analyst at Caixa Investment Banking, said banks were pressured by the depreciation of the sovereign debt on their books, their own liquidity problems and forthcoming European financial stress tests.
"For banks, it's not a theoretical issue but a practical one," said Rodrigues.. "It's an additional pressure factor to push Portugal into seeking a bailout or an interim loan."
Opposition would back short-term loan
A short-term loan has been mooted by Portugal's opposition Social Democrats. The party's leader, Pedro Passos Coelho, suggested it in a Reuters interview last month. Such a loan could soothe concerns around two big bond redemptions the country faces in April and June, which total about 9 billion euros.
It would be separate to any eventual bailout, which economists say is virtually inevitable.
The euro slipped from a five-month high versus the dollar, knocked by the Moody's downgrade. The cost of insuring Portuguese debt against default rose and 10-year Portuguese bond jumped above nine percent.
Portuguese bond yields have shot higher since the resignation of the government two years before its term ends and yields are scaling new euro-era highs on a daily basis.
"The government's current cost of funding is nearing a level that is unsustainable, even in the short-term," Moody's said.
The country held an extraordinary auction of one-year bonds last week, raising over 1.6 billion euros. It will offer up to one billion euros of 6- and 12-month Treasury bills on Wednesday.
Jornal de Negocios ran a separate column on Tuesday titled "Game over, we have lost, Mr Engineer," referring to Prime Minister Jose Socrates who has insisted the country needs no outside help.
Socrates, whose government remains in place as caretaker until elections on June 5, vowed on Monday to keep resisting a foreign financial rescue for the debt-laden country, including the short-term loan suggested by the opposition.
A euro zone source told Reuters on Monday that finance ministers will discuss on Friday Portugal's options under an interim government, including whether it is capable of requesting EU financial aid.