Portugal nearer bailout as sovereign debt yield escalates

PORTUGAL EDGED further towards a bailout yesterday as its sovereign debt yields shot up, despite continued denials on the part of the Portuguese administration that the country needs assistance.

Speaking in Brussels, José Sócrates, Portugal’s prime minister, dismissed the idea that a bailout would be better for the EU as a whole.

“The idea that Europe would be better defended if Portugal requested external aid is a childish idea,” Mr Sócrates said. If Portugal fell, other countries would follow, he added.

“That would mean supporting the domino theory, in which one goes after the other,” the prime minister said. “This has to stop, and it will stop here. Portugal does not need any rescue fund, Portugal does not need external help, and Portugal will defend itself.”

His comments did little to reassure the markets, which were already digesting a second Portuguese sovereign downgrade in as many days.

Standard & Poor’s (S&P) cut Portugal’s credit rating by two notches to BBB, dangerously close to junk status.

The ratings agency, which followed in the steps of Fitch, said the political crisis stemming from Wednesday’s rejection of austerity measures in Portugal had heightened risks about debt repayment.

The agency also warned that further rate cuts could lie ahead.

Eileen Zhang, an S&P credit analyst, said the political uncertainty caused by the collapse of the government could damage market confidence, pushing up financing costs and increasing the likelihood Portugal would seek an international bailout.

Yields on all maturities of Portuguese bonds rose to euro-era highs again yesterday, with investors worrying about the country’s chances of meeting €9.5 billion in debt payments due between April and June.

Portugal had planned to sell as much as €20 billion in bonds this year to finance its budget and cover maturing debt.

The yield on two-year debt was 36 basis points higher at 7.073 per cent as European markets were closing last night. On 10-year debt, the yield had climbed by 12.5 points to 7.786 per cent.

The difference in yield that investors demand to hold the securities instead of German bunds meanwhile also widened.

Irish bonds were in the spotlight too, with yields on a number of maturities rising yesterday. Two-year yields remained stubbornly close to 10 per cent, ending the day at about 9.99 per cent. Five- and 10-year yields both lingered above the 10 per cent level, with all eyes on next week’s results of bank stress tests as the next driver.

Analysts said the reaction in Portugal to recent downgrades and the prime minister’s resignation was relatively subdued as investors believed Lisbon would eventually receive a bailout from the European Financial Stability Facility (EFSF).

“It’s fair to say that the market believes the EFSF will eventually save the day,” said Jim Reid, credit strategist at Deutsche Bank.

Luxembourg prime minister Jean-Claude Juncker, also in Brussels, was keen to say the EU is not “there to push Portugal to ask for aid”. He noted, however, that the EFSF has sufficient fire-power to allow for a Portuguese bailout.

It is expected any bailout for Portugal would total as much as €70 billion. Mr Juncker said markets would be “convinced” by measures agreed by European governments on a permanent European Stability Mechanism.

(Additional reporting, Bloomberg, Financial Times Limited, 2011)