Bloomberg: Portugal Seeks EU Bailout, Joining Greece, Ireland

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Portugal Seeks EU Bailout, Joining Greece, Ireland
By Joao Lima, Jim Silver and Anabela Reis - Apr 7, 2011 5:48 AM GMT+0900

Portugal has asked the European Union for a bailout after a domestic political crisis helped push borrowing costs to record levels, making it the third euro region country to seek a rescue.

“I tried everything but we came to a moment that not taking this decision would bring risks we can’t afford,” Prime Minister Jose Socrates said in a televised statement from Lisbon today. “The government decided to make the European Commission a request for financial aid.”

Socrates, who is presiding over a caretaker government with limited powers until he leads his Socialist Party in the June 5 elections, didn’t give details on the kind of package that Portugal needs. Social Democratic Party Leader Pedro Passos Coelho said the nation’s biggest opposition group will support the aid request of the current administration. The International Monetary Fund said it stands ready to assist Portugal if needed.

Portuguese bond yields have surged since Socrates offered to resign on March 23 following a parliamentary rejection of proposed budget cuts. His government has insisted for the past year that the country didn’t need help to meet its commitments and has engaged in the deepest spending squeeze in three decades to narrow the nation’s deficit.

That didn’t stop the yield on Portugal’s 10-year government bond rising to a euro-era high of 8.804 percent today. Portuguese government bonds due March 2012 were sold today at an average yield of 5.902 percent. That’s more than Germany pays for 30-year bonds.

Debt Premium

The premium that investors demand to hold Portuguese debt over German bunds reached a euro-era record of 544 basis points yesterday. The euro was little changed against the dollar after Socrates’s announcement today, trading close to a 14-month high at $1.4333 as of 9:26 p.m. in Lisbon.

“The President of the European Commission assured that this request will be processed in the swiftest possible manner, according to the rules applicable,” the European Commission said in a statement.

EU governments will wait for Portugal to make a formal request before assessing the terms and size of any bailout, said a German government official, who spoke on condition of anonymity. The IMF stands ready to assist, though it hasn’t been asked for aid, a spokesman said in an e-mailed statement.

Tullia Bucco, an economist at UniCredit in Milan, said that the country will need about 65 billion euros ($93 billion) to cover its funding needs for the next three years, including 10 billion euros to bolster bank capital.

Bucco’s View

“The market was already pricing the fact that Portugal would have been forced to ask for external aid,” said Bucco. “I don’t see major risks of contagion.”

A spokeswoman at Socrates’s office in Lisbon declined to comment on what form of aid the government will request.

Portugal is the latest country to seek an EU-led bailout after Greece sparked a sovereign debt crisis that threatened to splinter the euro region a year ago and engulfed Ireland in November. The International Monetary Fund contributed to both.

Portugal has been trying to avoid requesting aid for the first time since 1983, when it received external help from the Washington-based IMF. Its credit rating was nevertheless cut by Moody’s Investors Service for the second time in three weeks yesterday, taking it to Baa1. That’s the same level as Ireland, Russia, Mexico and Thailand.

Portugal has struggled to convince investors it can avoid a bailout partly because its economy has barely grown in the past decade. It has expanded at an average annual rate of less than 1 percent in the period, ranking among Europe’s weakest growth rates. Unemployment rose to 11.1 percent in the fourth quarter, the highest since at least 1998, as the economy contracted for the first time in a year.

Portugal reported a budget deficit last week equal to 8.6 percent of the 2010 gross domestic product, higher than the 7.3 percent the government had previously forecast.

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Jim Silver in Lisbon at jsilver@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net