June 25, 2024

Debt-Ridden Portugal Asks for Financial Bailout

The decision came after the government was forced earlier in the day to pay significantly higher rates in order to sell more debt.

Recognizing that Portugal’s borrowing costs had become unsustainable, Prime Minister José Sócrates said in a televised address on Wednesday night that he had requested aid from the European Commission. He did not, however, specify the timing of any bailout.

“I had always considered outside aid as a last recourse scenario,” Mr. Sócrates said. “I say today to the Portuguese that it is in our national interest to take this step.”  

Though the financial markets and European officials have long expected Portugal to apply for aid, the speed with which things moved Wednesday appeared to take officials in Brussels by surprise, leaving the timetable unclear.

Assuming the Portuguese government has an agreement with the opposition on the need for a rescue, European Union can start negotiating the tough conditions that will be attached to one.

If the pattern of previous bailouts is repeated, a team of officials will be sent to Lisbon to discuss the terms, which will then need to agreed upon by European finance ministers, but that will probably not happen for several weeks.

In a statement late Wednesday the president of the European Commission, Jose Manuel Barroso, said Portugal’s request “will be processed in the swiftest possible manner, according to the rules applicable.”

Mr. Sócrates, who had been governing without a parliamentary majority, resigned last month after lawmakers rejected his latest austerity package. To break the political deadlock, Portugal is set to hold another general election on June 5. In a separate televised address, Pedro Passos Coelho, the leader of the main Social Democratic opposition party, said that he backed the decision to seek outside help.

Caught in a political crisis and facing tough refinancing hurdles for the next three months, Portugal has also been hit by repeated downgrades by credit rating agencies, sending yields this week on Portuguese government debt to their highest levels since the start of the euro.

Portuguese banking executives warned this week that they did not want to take on more sovereign debt, urging the government to negotiate an international bridge loan with Portugal’s European partners. Alongside that of Portuguese banks and companies, “the rating of the country has fallen like never before,” Mr Sócrates said. “This is a particularly serious situation for our country.” 

Bailing out Portugal is likely to require about 75 billion euros, or $107 billion, according to a recent estimate by Jean-Claude Juncker, the prime minister of Luxembourg, who also presides over meetings of euro-zone ministers.

Such emergency financing will ensure that Portugal can meet its 20 billion euros of borrowing requirements for the year. But it is likely to set off debate over what conditions will be tied to any rescue package, at a time when Portugal struggles with record unemployment and an economy that is likely to contract 1.3 percent this year, according to a recent forecast from the Bank of Portugal.

Further, the government’s recent effort to push through more an austerity package combining more spending cuts and tax increases prompted hundreds of thousands of Portuguese residents to take to the streets last month, as evidence of rising social unrest.

“Outside intervention will be positive for our treasury but could be a disaster for our economy,” said Diogo Ortigão Ramos, a partner and specialist on fiscal legislation at a law firm, Cuatrecasas, Gonçalves Pereira in Lisbon. “Whoever forms the next government, our creditors will have the final word.”

Mr. Sócrates said that the decision to seek help was taken amid expectations that market conditions would continue to worsen for Portugal.

Earlier on Wednesday, Portugal sold Treasury bills at a much higher cost than last month. It sold 455 million euros, or $650 million, of one-year Treasury bills at an average yield of 5.9 percent, compared with 4.33 percent yield when Portugal last sold such bills on March 16.

The national debt agency also sold 550 million euros of six-month bills at an average yield of 5.12 percent, compared with a yield of 2.98 percent at a previous auction on March 2. The Treasury bill sale came after Moody’s on Tuesday cut the sovereign rating of Portugal for the second time in a month. On Wednesday, Moody’s also downgraded by one or more notches the senior debt and deposit ratings of seven Portuguese banks.



Stephen Castle contributed reporting from Brussels.

Article source: http://feeds.nytimes.com/click.phdo?i=a317e4c5ad7fd977bf7d18015f91c28a

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