THE EUROPEAN Central Bank intervened in the markets for the first time in a week yesterday to prevent Portugal’s borrowing costs spiralling to “danger levels” that could trigger a new phase in the euro-zone debt crisis.
Portugal’s borrowing costs and the premium the country must pay over Germany, Europe’s strongest economy, hit fresh euro-era highs as worries over Lisbon’s ability to repay its debts mounted further.
Don Smith, economist at Icap, warned: “We are now at a very precarious point in the euro-zone crisis, with Portuguese yields close to danger levels that could force the country to seek bailout loans.”
Many bankers say Lisbon can only be saved from a bailout by the intervention of the ECB, which traders said bought Portuguese bonds as 10-year yields hit 7.58 per cent and spreads over Germany rose to 4.38 percentage points.
Bankers say the ECB is unlikely to allow Portuguese spreads over Germany to rise above 4.5 percentage points – the level at which clearing houses are expected to raise margin payments on banks that want to use Portuguese bonds as collateral for loans.
Lisbon has insisted it has no need of a financial rescue, denying reports the country was under pressure from other euro-zone governments to turn to the EU’s bailout fund for assistance.
“Portugal has no need of outside help,” a spokesperson for prime minister José Sócrates said yesterday. Any suggestion the government was negotiating a bailout was “totally false”.
The denial came amid reports, quoting unidentified EU officials, of a growing consensus among euro zone finance ministers that Portugal would not be able to sustain its current high borrowing costs beyond March.
Senior figures in Portugal’s minority socialist government have been making increasingly strong calls for a EU-wide response to the debt crisis, criticising “delays and hesitations” in talks on improving financial stability in the euro zone.
For the past two weeks the yield on the 10-year bond has remained above 7 per cent, a level most investors consider unsustainable.
The yield on five-year Portuguese government bonds yesterday rose to a euro-era high of 7.133 per cent.
A senior Portuguese opposition figure joined international economists and analysts in saying Portugal would soon be forced to follow Ireland and Greece in turning to the European financial stability facility, the EU rescue fund, for help.
Luís Marques Mendes, a former leader of the centre-right Social Democrats (PSD), the main opposition party, said: “With bond yields stabilised above 7 per cent and the beginning of an economic recession, a request for external aid is inevitable.”
Recent comments by Carlos Costa, Portugal’s central bank governor, that the country was entering a double-dip recession as a result of tough austerity measures, have added to concerns over Portugal’s debt-laden economy.
– (Copyright The Financial Times Ltd 2011)
