Portugal managed to borrow money from financial markets Wednesday despite fears about its credit worthiness and a mounting political crisis that could knock its economic recovery plan off course and set back European efforts to contain the continent's debt crisis.
Investors, however, demanded a higher return in the sale of 1 billion euros ($1.4 billion) in 12-month Treasury bills Wednesday — the interest rate rose to 4.3 percent from 4 percent two weeks ago. A year ago, Portugal paid interest of 1 percent on 12-month T-bills.
The auction came a day after Moody's downgraded the country's credit rating, adding pressure on the beleaguered minority government, which is battling to avoid taking a bailout like Greece and Ireland did last year.
Last weekend's surprisingly broad EU plan to deal with the debt crisis was greeted positively in the markets in the early part of the week. But a bailout for Portugal could trigger a renewed deterioration in eurozone markets and destabilize other, bigger nations. Spain, Belgium and Italy are all also weighed down by large debts.
Though its borrowing problems are not as acute as those of Greece and Ireland, Portugal's feeble growth over the past decade has dragged it deeper into the continent's sovereign debt woes and its borrowing costs have consequently surged.
Portugal has so far experienced little difficulty raising money at prices that are tolerable in the short term, though the European Central Bank has recently stepped in to buy its bonds in the markets in an attempt to stem the rise in the country's market rates.
"Portugal is paying a high price for short-term funding, but 4.3 percent doesn't amount to a breaking point," Filipe Silva, debt manager at Banco Carregosa, said. He said a rate of 5 percent would mean Portugal had reached "a point of no return," forcing it to ask for international assistance.
The government's efforts to end the country's financial agony have placed it in a delicate position. Its tax hikes and cuts to welfare benefits have brought a wave of strikes and could yet spell its downfall.
Prime Minister Jose Socrates said late Tuesday he would quit if Parliament doesn't consent to his government's latest batch of contested austerity measures — the fourth set of measures in 11 months. No date has yet been set for parliamentary vote, though Socrates has said he doesn't want to go to a March 24-25 EU summit without the plan approved.
Opposition parties have balked at the new steps, devised to restore market confidence in Portugal and hopefully lower the country's unsustainable borrowing costs. The government's opponents say the need for more measures shows the government has failed to get Portugal's economy back on track.
Finance Minister Fernando Teixeira dos Santos said the political standoff was more important than the rating downgrade, which he said was expected.
The outcome of the parliamentary vote "will determine our ability to go to the markets" for funding, he told reporters.
Portugal's budget deficit hit a record 9.3 percent of gross domestic product in 2009. That was the fourth-highest level in the eurozone and has alarmed markets.
The government says it reduced the deficit to below 7.3 percent last year and is aiming for 4.6 percent this year.
European leaders backed the government's strategy at a summit last week which offered Portugal a way out of its woes without resorting to a bailout like Greece and Ireland.
The plan, to be ratified at the summit of leaders next week, includes increasing the size of the bloc's bailout reserve and allowing it to purchase government debt which investors are reluctant to take on.
The government has acknowledged that the interest rates it is paying on loans — for weeks at more than 7 percent on Portuguese 10-year bonds — are unsustainable in the long term.
Moody's said it expected Portugal to struggle to generate economic growth and meet its ambitious spending reduction plans.
Some analysts fear the austerity measures could backfire as they bite further into Portugal's weak economic recovery after a contraction in 2009. The Bank of Portugal expects a double-dip recession this year, while the jobless rate has risen to a record 11.2 percent.
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