March 16, 2011 / 4:04 PM / 9 years ago

Portugal yields rise, government warns of political crisis

LISBON (Reuters) - Portugal’s government blamed higher rates paid at a debt auction on Wednesday on the opposition’s refusal to back its latest austerity plans, warning a political standoff could force it to seek a bailout.

Pressure on Lisbon mounted after Moody’s rating agency downgraded Portugal by two notches late on Tuesday, highlighting the challenges it faces in riding out its debt crisis.

The yield on 1 billion euros ($1.40 billion) of 12-month treasury bills rose to 4.331 percent at the auction, compared with 4.057 percent two weeks ago.

Spain, by contrast, obtained lower yields at a T-bill auction on Tuesday and is viewed as less and less likely to need an EU/IMF bailout following a surprisingly strong package of debt measures agreed by euro zone leaders last weekend.

The worsening financing situation for Portugal — which many economists say is the next likely euro zone country to need a bailout after Greece and Ireland — suggests the deal to boost the euro zone rescue fund may have come too late for it.

Portugal’s plight has become yet more complicated by the fact that the main opposition Social Democrats have refused to back the government’s latest austerity plans, which are aimed to ensure the country meets its budget goals.

“Failure to approve the new measures in the budget plan would push the country to external help,” Finance Minister Fernando Teixeira dos Santos told parliament’s budget committee. “Current market conditions are unsustainable in the medium- and long-term.”

A Reuters poll of 45 economists found a 60 percent chance that Portugal will need a bailout like Greece and Ireland, with the expectation that it will happen by June.

Prime Minister Jose Socrates warned on Tuesday that his minority government would be unable to continue if the country’s long-term economic strategy, which includes the latest austerity measures, was not passed in parliament.

“Yield levels in Portugal still trade above their snowball level — where the level of interest charged means their level of debt stock is going up — and that means that longer-term the situation, despite their best efforts, is getting worse not better,” said rate strategist Charles Diebel at Lloyds Bank.

So far, the Social Democrats have supported the government’s austerity measures and Teixeira dos Santos urged them to negotiate. But analysts increasingly think the political standoff could lead to a collapse of the Socialist government.

“Attention has now turned to the approval or not of the economic strategy and the possibility of a political crisis,” said Filipe Silva, debt manager at Banco Carregosa in Porto.


“Jose Socrates has played his last dramatic card,” said daily Diario de Noticias in an editorial. “But this time it appears the Social Democrats are not ready to dance.”

Since the Social Democrats now have a lead in opinion polls they may try to push the government out by making it unable to pass legislation and prompt a snap election.

The Portuguese, who are facing higher taxes, lower social benefits and a likely return to recession this year, have stepped up protests against austerity. But it was not clear they want a change of government.

“I hope there will not be elections soon. I see that as a negative option and hope that PSD acts responsibly,” said Paulo Bernardes, a hotel maintenance manager aged 45.

Social Democrat leader Pedro Passos Coelho has requested a meeting with President Anibal Cavaco Silva and is due to meet him on Thursday. Cavaco Silva has the constitutional power to fire the government if democratic institutions are at risk.

Julio Correia, a 63-year-old self-employed businessman, said he hoped there would be no snap election. “But if the vote is held, and power passes over to the Social Democrats there will not be much change, things will stay the same,” he said.

The government’s latest measures were announced on Friday and included cuts in spending on infrastructure and social welfare equivalent to 0.8 percent of GDP.

Moody’s cut Portugal’s sovereign debt rating by two notches to A3 late on Tuesday and said it might have to downgrade again given the impact of high borrowing costs and the difficulty of meeting tough fiscal targets.

Still, the IGCP debt agency sold all 1 billion euros ($1.40 billion) in T-bills on offer, with demand outstripping supply by 2.2 times. The yield at the auction of 4.331 percent was below record levels seen in December at 5.28 percent.

The yield on Portugal’s 10-year bonds was at 7.67 percent while the spread to safer German Bunds stood at 456 basis points, up from Tuesday’s 446 basis points. Risk premiums hit euro lifetime highs last week.

Additional reporting by Andrei Khalip, Daniel Alvarenga, Elisabete Tavares, Sergio Goncalves, Filipa Lima; Writing by Axel Bugge, editing by Mike Peacock

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