Portugal borrowing cost skyrockets as bailout looms

Portugal was forced to pay high interest rates to raise €1 billion in treasury bills on Wednesday, as the country appears increasingly likely to ask for a massive bailout to alleviate its mounting debt burden.


AP - Portugal managed to raise about €1 billion ($1.4 billion) in a Treasury bill sale Wednesday but paid a high rate for the cash as it appears inevitable the debt-stressed country will soon need a massive bailout.

The government debt agency sold €560 million in T-bills that mature in October and €450 million in bills maturing in March next year.

But investors asked for high interest rates - 5.11 percent and 5.9 percent - to part with their money. In similar auctions last month, Portugal paid a rate of just under 3 percent on 6-month bills and 4.3 percent on 12-month bills.

The figures show how market confidence in Portugal’s financial future is evaporating as investors bet the country will not be able to manage its debt load on its own. The yield on the 10-year bond, for example, rose to a new euro-era record of 8.78 percent Wednesday.

Most analysts expect Portugal, part of the 17-nation eurozone, will soon accept a bailout like Greece and Ireland. It is expected to need up to €80 billion.
“Portugal was able to issue debt once more, but the rates are prohibitive,” Filipe Silva, debt manager at Banco Caregosa, said. “The big question ... is where the buyers will come from for future sales.”

Even Portugal’s short-term borrowing rates are now much higher than what it would likely have to pay for bailout loans as the yield on 5-year bonds is now 10 percent. By contrast, Irish average interest rates - currently under review for a decrease - are 5.8 percent for loans with longer maturities.

Portugal has over the past year insisted it doesn’t want assistance from Europe’s bailout reserve and the International Monetary Fund because the terms of a big loan would lock it into austerity measures for years, lowering the standard of living in what is already one of western Europe’s poorest countries. Athens and Dublin were reluctant to accept help for the same reasons.

But authorities are being cornered by the crisis. Rating agencies have downgraded Portuguese bonds to near junk status in recent weeks as new figures showed its debt load is worse than initially thought.

Added to that, the government quit last month after opposition parties rejected its austerity measures and the country is in political limbo until a June election, making it uncertain who has the power to ask for help.

Investors, including the country’s main banks, are balking at providing funds to Portugal out of fear it may not be able to settle its debts. As financing dries up, companies could have problems finding money to pay wages.

The Finance Ministry said in a statement that the T-bill interest rates showed that the opposition’s rejection of its austerity plan, which had won the support of European authorities, had caused “irreparable” damage.

The ministry insisted that Portugal is able to meet its financial obligations but would not hesitate to take extra measures to ensure the financing of the economy. The statement did not elaborate.

Portugal’s bankers are urging the caretaker government to ask its European Union partners for a bridge loan of at least €10 billion to see it through the election.
The president of the Portuguese Association of Banks, Antonio de Sousa, said substantial financial support is “urgent.”

“The banks have no more credit left to give,” he was quoted as saying Wednesday by national news agency Lusa.

Moody’s on Wednesday downgraded the credit ratings of the country’s leading banks, following a similar move by Fitch the previous day.

“While a solution to the funding needs would be to negotiate a bailout package from the EU/IMF, it would seem more appropriate to postpone programme negotiations until after June 5 when a new government is in place,” Barclays Capital said. “In our view, the more reasonable option at this stage seems to be for the EU to provide some form of bridge loan, possibly in the form of bilateral country loans from EU countries.”

Daily newsletterReceive essential international news every morning