Portugal moves toward a bailout--but first it needs a government
04/06/2011 1:55 pm EST
It would help, of course, if there were a Portuguese government to negotiate with. But you can’t have everything.
On April 5, for the second time in three weeks Moody’s downgraded Portugal’s long-term government bond ratings to Baa1 from A3. The company also said that it is considering another downgrade.
On April 1, Fitch Ratings dropped the country three steps to BBB-. That is the company’s lowest investment grade rating.
In response the bond market drove the price down and the yield up on Portugal’s government debt for an 11th consecutive day. In London the yield on the government’s 10-year bonds reached a record 8.8% on April 5. Earlier in the Portuguese debt crisis credit analysts said an interest rate above 7% wasn’t sustainable since it saddled the country with interest payments that would prevent any government from closing the country’s budget deficit.
At the moment there is no Portuguese government—and won’t be until after June 5 elections. Prime Minister Jose Socrates resigned on March 23 after opposition parties rejected his plan for cutting the budget deficit.
Portugal plans to sell up to $1.3 billion in short-term government bills today, although it’s not at all clear who the buyers might be. On April 4 Portuguese banks reportedly told the Bank of Portugal that they won’t be buying any more government debt in coming months.
Larger refinancings loom on April 15 and June 15 that total $13 billion.
The European Central Bank has denied that it will offer Portugal a bridge loan to see it through these refinancings.
But if not the European Central Bank, then who? My guess is that despite its denials the European Central Bank will somehow patch together enough financing to muddle along until there’s a government able to strike an official deal with the European Financial Stability Facility along the lines of the deals brokered by the European Union with Greece and Ireland.
I don’t think the troubles in Portugal will change the European Central Bank’s mind on raising benchmark interest rates to 1.25% from the record low 1% at its April 7 meeting. I think the bank is convinced, rightly, that Portugal’s problems go far beyond anything that keeping interest rates at 1% can fix.