Portugal is set to start hammering out a bailout package that may total 75 billion euros ($107 billion) as it becomes the third euro-region country to seek European Union aid.
Finance Minister Fernando Teixeira dos Santos meets other officials from the 16 euro nations near Budapest tomorrow after Prime Minister Jose Socrates said last night he had no choice than to seek aid. The yield on Portugal’s 10-year bonds, which hit a record after Socrates called early elections last month, rose 3 basis points to 8.465 percent today.
Portugal is the latest nation to seek an EU-led bailout after Greece sparked a sovereign-debt crisis that threatened to splinter the euro region a year ago and then engulfed Ireland. The challenge for dos Santos will be negotiating an interest rate on bailout loans that doesn’t strangle an economy that’s barely grown in the past decade or spark the public outcry that greeted Ireland’s bailout package in November.
“Clearly the view of the market was that this was inevitable and that it was only a matter of timing even if we still don’t know what the deal will be,” said Julian Callow, chief European economist at Barclays Capital in London.
The euro weakened 0.4 percent to $1.4278 at 10:54 a.m. in Lisbon today. The difference in yield between that Portuguese 10-year bonds and comparable German bonds widened 2 basis point to 513 basis points today.
Portugal’s package is likely to be worth as much as 75 billion euros, said two European officials with knowledge of the situation. Portugal may pay rates similar to what Greece is being charged for its rescue loans, which were renegotiated last month, Goldman Sachs Group Inc. said in a report to clients.
Greece pays 3.5 percent for the first three years of its plan and 4.5 percent thereafter. Ireland, which is also trying to get lower terms, currently pays an average of 5.8 percent.
“We would assume that it would be lower, as Greece got a 100 basis point cut in its rate, and Ireland could have gotten something similar if they had played ball on their corporate tax rate,” said Padhraic Garvey, head of developed-market debt at ING Groep NV in Amsterdam.
Socrates said in a televised statement late yesterday he “tried everything” to avoid a bailout as 9 billion euros of bond maturities loom in April and June.
The announcement sparked optimism that the worst of Europe’s sovereign debt crisis is over and won’t threaten Spain, the euro region’s fourth-largest economy. The premium investors demand to hold Spanish debt over German bunds was little changed at 180 basis points today, and has dropped more than 100 basis points from its euro-era record in November.
“We do not expect any other EMU sovereign to be in need of financial assistance,” Francesco Garzarelli, Goldman Sachs London-based chief interest-rate strategist, in a report to clients.
At the same time, the euro region is still threatened by the risk that countries receiving aid won’t be able to tame their deficits and may be forced to restructure debt.
“The urgent question still remains whether sovereign debt will have to be restructured, particularly in the case of Greece,” said Torge Middendorf, an economist at WestLB in Dusseldorf. “Should there indeed be a restructuring, Germany’s banks would be hit particularly hard.”
At 12.7 percent, Greek 10-year bond yields are almost 390 basis points higher than last April before the country received bailout funds. Standard & Poor’s Ratings Services said last week Greece may have to restructure its debt as “there are growing risks to the sovereign’s budgetary position.”
Attention now turns to European Central Bank President Jean-Claude Trichet, whose Governing Council may today vote for the euro region’s first interest-rate increase since 2008.
The ECB has already suspended collateral conditions for all securities guaranteed by the Greek and Irish governments and Portuguese banks have been virtually cut off from interbank markets.
Banks led the gains on Portugal’s benchmark PSI Index today, with Banco Espirito Santo SA, adding 5.4 percent to 3.026 euros and Banco Comercial Portugues SA advancing 4.8 percent to 62 euro cents.
Portugal’s bond yields surged to records this month after Socrates resigned on March 23 when parliament rejected new austerity measures that aimed to bring the euro region’s fourth largest budget deficit within the EU’s limit of 3 percent of gross domestic product next year. Elections are set for June 5.
Rising interest rates may complicate efforts to cut deficits across the euro region. The ECB is forecast to raise its benchmark rate today by a quarter point to 1.25 percent, according to all 57 economists in a Bloomberg News survey, to counter inflationary pressures after oil prices jumped.
The European Commission said the Portuguese aid request will be dealt with “in the swiftest possible manner.” Portugal may initially ask for a bridging loan to bolster its finances until a new government has been formed, said David Keeble, head of interest-rate strategy at Credit Agricole Corporate & Investment Bank in New York.
Portugal reported a 2010 budget deficit last week equal to 8.6 percent of gross domestic product, higher than the 7.3 percent the government had previously forecast, after a change in EU accounting rules forced it to add more than 2 billion euros in charges to last year’s accounts.
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