Portugal requests EU bailout

 

Portugal's caretaker government has said it needs financing from the European Union, marking a turnaround after resisting asking for aid for months despite sharply deteriorating financial conditions.

Portugal's situation worsened last month after the government resigned, sending bond yields soaring, sparking a series of rating downgrades and a warning by local banks that they may no longer be able to buy government debt.

"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 this evening.

"The government decided to make the European Commission a request for financial aid." Mr Socrates, who is presiding over a caretaker government with limited powers until June 5 elections, didn't give details on the kind of package that Portugal needs.

Portuguese bond yields have surged since Mr Socrates offered to resign on March 23 following a parliamentary rejection of proposed budget-deficit 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 cuts in three decades to narrow the budget deficit.

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

The premium that investors demand to hold Portuguese debt over German bunds reached a euro-era record of 544 basis points yesterday.

"In this difficult situation, which could have been avoided, I understand that it is necessary to resort to the financing mechanisms available within the European framework," Finance Minister Fernando Teixeira dos Santos said earlier.

Portugal's Social Democratic Party, the biggest opposition group, said it will support the government's request for external aid, Pedro Passos Coelho, the leader of the Social Democrats, said tonight.

Portugal's request for EU financial help is a responsible move to stabilise the situation in the country and Europe, Economic and Monetary Affairs Commissioner Olli Rehn said.

"This is a responsible move by the Portuguese government for the sake of economic stability in the country and in Europe," Mr Rehn told Reuters. The amount of aid is to be determined shortly, he said.

Earlier today, the country issued €1 billion in treasury bills. The finance ministry said the auction was a confirmation of the deterioration caused by the rejection of the austerity measures.

The government has held out hope previously that by steadily meeting budget goals and cutting spending it could regain investor confidence and avoid a bailout.

In the latest threat to the government's resistance to seeking foreign financing, local banks warned the government on Monday that it must seek a short-term emergency loan to soothe market concerns ahead of the election, saying that under current conditions they cannot continue buying government debt.

Reuters