Portugal on verge of bailout
In the wake of a sovereign debt ratings downgrade by the rating agency Moody’s, Portuguese five-year bonds are trading with a yield of 10%. As a result, Portugal has leapt over Ireland into fourth place on the credit default swaps list of highest default probabilities amongst sovereign debt issuers.
A bailout by the European Union is a certainty, according to Moody’s.
The caretaker government under Prime Minister José Sócrates continues to insist there have been no discussions about a bailout. This is not credible. Mr. Sócrates was forced to call a new general election as his austerity budget was rejected by the Portuguese parliament. Subsequently, the country’s debt was downgraded by both S&P and Moody’s. Last week, we also learned that the Portuguese had missed their deficit target of 7.3pc last year. The deficit ended at 8.6pc. The country also revised 2009’s deficit up to 10pc from the previously reported 9.3pc figure.
Portuguese daily Jornal de Negócios has written that the country’s biggest banks met with the head of the Central Bank yesterday, imploring him to have the government contact Brussels in order to help secure financing before the general election in June.
All of this leads to a lack of credibility for the Portuguese government. The ECB is expected to raise interest rates this Thursday, adding further pressure to the periphery. Even German interest rates have climbed on the back of these expectations. This is why markets are selling Portuguese bonds. And with yields at these levels, a bailout is now inevitable.
After Portugal hits the wall, all eyes will turn to Spain.