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Portugal edges towards a bailout as banks baulk

PORTUGAL'S biggest banks tried to bounce the country's caretaker government to accept a short-term bailout as the country's credit rating was downgraded.

The idea of a short-term loan was dismissed by the European Commission although some unconfirmed reports last night suggested the country has already begun talks on a bailout.

Portugal's 10-year government bonds dropped for the 11th consecutive session yesterday after Moody's downgraded bonds for the second time in three weeks amid expectations it will need a European bailout.

Irish bonds gain

Irish bonds gained for a third day following last week's stress tests. The downgrade pushed the cost of insuring Portuguese government debt higher than Ireland's for the first time in seven months.

Portugal's downgrade "wasn't a great shock to the markets but it added to the considerable negative sentiment around the name. Ireland continued to tighten, benefiting from the clarifying effects of the stress tests last week," said Gavan Nolan, a credit analyst at Markit.

"Opposing movement in the two sovereigns means that Portugal is now trading wider than Ireland for the first time since last August. Both countries face uncertain times ahead."

The European Commission ruled out any chance of Portugal securing a bridging loan from its European partners without agreeing first to an international debt bail-out.

Portugal has a caretaker government and is in the middle of an election campaign which ends on June 5.

Portuguese newspaper 'Jornal de Negocios' reported yesterday that the country's biggest banks had decided to stop buying government bonds, presenting the government with a problem as Lisbon has to raise fresh funds to pay back €9bn of state debt by mid-June.

The paper 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 the election.

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.

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