Friday 9 December 2016

Portugal closer to bailout as 10-year yield hits 7.4pc

Published 03/03/2011 | 05:00

Portuguese prime minister Jose Socrates
Portuguese prime minister Jose Socrates

PORTUGAL'S government debt came under renewed attack in the bond markets last night, as the country's Prime Minister Jose Socrates met with German Chancellor Angela Merkel in Berlin.

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Talks between the two came as Portugal battles to avoid signing an Irish-style IMF/EU bailout deal. The yield, or interest, Portugal has to pay to borrow over 10 years hit 7.4pc yesterday.

That is too high to viably finance the state, especially for a country with little or no economic growth. The current yield means the country is being forced out of the long-term debt markets.

If Portugal accepts a bailout deal, it will pay "just" 6pc to access emergency loans under the same terms Ireland signed up to in November.

Portugal is resisting a deal, hoping self-imposed austerity can win back investor confidence. Portugal wants bailout funds to buy its bonds, not lend to the country directly.

However, yesterday Christopher Iggo, chief investment officer for French bond investor Axa Investment Managers, said Portugal would accept a bailout "within the next few weeks".

He said the country's borrowing costs were simply too high.

"Ireland and Greece had to go for a bailout once their borrowing costs got that high, so I fully expect Portugal to go within the next few weeks," Mr Iggo said, in an interview with Bloomberg.

Funding

Portugal did raise €1bn in government loans yesterday, by selling short-term debt at a high price.

Analysts say that is not a viable funding solution over the medium term. The country needs more than €9bn to pay off debt falling due in April and June.

Last night, Ms Merkel praised Portugal's efforts to reform its economy and manage its debt problems. However, analysts believe she also used the talks to try to persuade the Portuguese prime minister to accept a bailout.

Portugal could be rescued without an increase in the funds Europe has available under its existing bailout mechanism.

Germany hopes that taking Portugal out of the markets through an EU-backed deal will restore confidence in the eurozone's ability to cope with the debt crisis.

The same thinking lay behind the Greek and Irish bailouts and the lack of progress here or in Greece since taking the deals is fuelling Portuguese scepticism about the approach.

Ratings agency Standard & Poor's said it was keeping Portugal's government debt under review for a downgrade.

The ratings agency said it would downgrade Portugal's credit rating by two notches to BBB, just above 'junk' status, if it accepted a rescue.

That is because under European Union proposals, rescue loans made after 2013 will rank higher than other debt in the event of a default.

Portuguese bond yields were 4.31pc above those of Germany yesterday. When Irish yields hit 4.5pc over Germany's, LCH Clearnet, a bond clearing house, imposed extra costs for anyone trading the paper. The move effectively ended our hopes of staying bailout free.

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