Portugal edging closer to a bailout after Moody's cuts country's rating
Borrowing cost on one-year bonds soars to 4.3pc as ratings agency warns of further downgrades
Published 17/03/2011 | 05:00
PORTUGAL'S debt crisis stepped up a gear after a Moody's downgrade caused its borrowing costs to soar yesterday.
It came after Portugal's prime minster warned opposition politicians that the country risks being forced into a bailout.
Rating agency Moody's downgraded Portugal's government debt rating by two notches to A3 before markets opened yesterday. Moody's said it expects its next rating move to be another downgrade.
The downgrade brings Moody's rating in line with rival Standard & Poor's assessment.
After the rating cut, Portugal auctioned €1bn of short-term bonds due to be repaid in 12 months at a record cost to the borrower.
The yield, or borrowing cost, of 4.331pc was twice what neighbouring country Spain had paid for one-year bonds just a day earlier.
Portugal paid a 4.057pc yield for one-year debt earlier this month.
Longer maturity Portuguese bonds also fell yesterday with the yield on 10-year bonds hitting 7.454pc.
Portugal's borrowing costs had dropped on Monday after European leaders agreed to increase the size of the rescue funds for struggling countries and to allow the funds to buy government bonds direct from the borrowers.
That "relief rally" collapsed on yesterday's news and after Portugal's Prime Minister Jose Socrates said the country was at risk of needing a bailout.
Mr Socrates told opposition leaders that the country was facing a political crisis if a fresh round of budget cuts was blocked.
"The consequence of a political crisis is the worsening of the financing risks of our economy and [that] would lead Portugal to request external intervention," Mr Socrates said late last night.
Portugal's situation has strong echoes of Ireland last November.
Moody's said it cut the country's rating in part because of fears the state will have to pay to recapitalise Portuguese banks that are locked out of the debt market.
Portuguese banks are dependent on the European Central Bank (ECB) for liquidity.
A similar situation in Ireland was the trigger used to force an IMF/EU package on the Government here.
As the potential need for rescue funds increased, the EU said it planned to issue €4.6bn of seven-year bonds as part of the fundraising for its bailout loans to Ireland.
A portion of the funds will also go to Romania.
The deal is expected within the week, but the timing has not been fixed because of the volatility in the market.
The money raised will go to the European Financial Stabilisation Mechanism (EFSM), one of two vehicles financing the Irish bailout deal.
The EFSM raises money by issuing bonds and lends the funds raised to Ireland at around twice the interest rate.
In January, a bond deal from the other bailout fund, the European Financial Stability Facility, was a record success after the Japanese finance minister bought a big proportion of the bonds.
Japan's interest drove down borrowing costs for the rescue fund, but is unlikely to be a feature of future deals given the crisis in that country.