Portugal’s cost of borrowing rose to the highest level for more than a decade early on Thursday, amid concern the resignation of Prime Minister Jose Socrates on Wednesday would delay any bailout for the country’s beleaguered economy.
The yield on the Portuguese two-year note jumped 18 basis points to 6.79 percent, as investors fretted over short term debts, while the cost of 10-year borrowing rose 10 basis points to 7.74 percent, the highest level since the European currency was launched in 1999.
As European leaders met in Brussels today to finalize details of a permanent sovereign rescue fund to replace the current European Financial Stability Facility (EFSF), it was almost inevitable that Portugal would request a bailout over the coming weeks, economists said.
“There is very little doubt that they will need external support at some point soon,” said Silvio Peruzzo, an economist at RBS in London. “The question is when, and the political situation means they will be unlikely to ask for anything at the summit, or over the next few days.”
Speaking ahead of the summit German Chancellor Angela Merkel said she “regretted” the Portuguese parliament’s rejection of the austerity package, which amounted to the equivalent of 4.5 percent of gross domestic product over three years.
Any deal to provide Portugal with a bailout would require the sanction of the IMF, which has agreed to provide one third of the 440 billion euro EFSE fund, due to be replaced by a permanent sovereign debt crisis resolution mechanism from 2013.
Portugal, which is scarred by the memory of two International Monetary Fund rescues since its return to democracy in 1974, has resolutely avoided resorting to asking for external financial support.
Socrates resigned on Thursday after parliament rejected his government’s deficit-cutting stability and growth program. The President will meet the main parties on Friday and the government will retain its powers until at least then.
Socrates had governed with a minority in parliament since the last election in 2009, and persuaded parliament earlier this year to agree to an initial raft of budget cuts. However, the most recent proposals were announced on March 11 without consultation, and were rejected by opposition leaders within hours. All five opposition parties in parliament voted against the plan on Wednesday.
If no agreement on an alternative government is found over the coming days, a caretaker administration will likely be put in place. In that case, the constitution requires a general election to be held after a prescribed period, with late May or early June seen as being the most likely targets.
“We are now looking at the country facing several months of political paralysis,” said Ciaran O’Hagan, head of rates research at Société Générale in Paris. “Of more immediate concern is what powers the caretaker government has. This is unlikely to include the powers to request EFSF support.”
Portugal faces 4.5 billion euros of bond redemptions in April and another 5 billion euros of maturities in June, as well as short-term bill liabilities in July, August, September, October and November. The country has said it intends to sell as much as 20 billion euros of bonds this year to finance its budget and cover maturing debt.
Portugal’s credit rating was cut two steps by Moody’s Investors Service on March 15 to A3, four steps from so-called junk status, with the outlook “negative.”
“We believe they do have enough cash holdings to get through the April redemptions, but the problem is the next maturity in June,” said Frank Engels, managing director in the economics research team at Barclays Capital. “An alternative might be some sort of bridging loan, which could be extended either by the EU or commercial banks.”
With markets likely to give Portugal an uncomfortable ride ahead of any elections, a caretaker government may not be able to wait until elections before seeking a bailout.
“It may be necessary to move before elections and given that we are likely to see the same sort of people in the caretaker government as in the previous administration that should not be impossible,” said RBS’s Peruzzo. “The caretaker government may not have the express authority, but the IMF has a history of negotiating in these sorts of situations and they may find some way to get them access (to funding).”
If Portugal does approach the EFSF for assistance it will be the third European country to do so in a year. The EU and IMF agreed an 85 billion euro bailout for Ireland in November, while Greece in April was given a 110 billion euro financing package.
