Portugal Set to Start Talks on $107 Billion Bailout as Spain Threat Eases
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.
The Portuguese government will make a formal aid request to the European Commission today, government minister Pedro Silva Pereira said today at a press conference in Lisbon. The request comes as Finance Minister Fernando Teixeira dos Santos travels to Budapest to meet with other officials from the other 16 euro nations near Budapest tomorrow.
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 Teixeira 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.
Prime Minister Jose Socrates said last night he had no choice than to seek aid as the country faces 9 billion euros of bond maturities in April and June. The yield on Portugal’s 10- year bonds, which hit a record after Socrates resigned last month and early elections were called, rose 6 basis points to 8.595 percent today. Portugal yesterday sold one-year notes at a yield of 5.9 percent, 200 basis points more than Germany pays for 30-year debt.
The euro weakened 0.2 percent to $1.4299 at 4:00 p.m. in Lisbon today. The difference in yield between that Portuguese 10-year bonds and comparable German bonds widened 6 basis points to 517 basis points today. The cost of insuring Portuguese sovereign debt rose 8 basis points to 562, according to CMA prices for credit-default swaps. The contracts earlier traded as low as 532 basis points.
Fitch Ratings said in a statement today that Portugal’s aid request “will help moderate the near-term risks to macro- economic and financial stability.”
German Finance Minister Wolfgang Schaeuble said today that it will take two-to-three weeks to assess a request for European aid made by Portugal. Conditions will be attached to any bailout granted, he said in an e-mailed statement.
The conditions and the amount of EU financial aid has not been defined yet, government minister Silva Pereira said at a press conference in Lisbon today.
“What we expect is that this request for financial assistance can provide the immediate response that our economy needs,” the minister said.
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 an average of 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.
The Social Democrats, Portugal’s biggest opposition party, would aim for a lower interest rate on the aid program than the rate on the Irish package, Antonio Nogueira Leite, an adviser of the Social Democratic Party, said today in a Bloomberg Television interview. The Social Democrats lead Socrates’ Socialist party in opinion polls, and elections are set to take place on June 5.
The terms of Portugal’s bailout package must be tighter than they otherwise would have been given the political situation caused by the pending elections, Finnish Prime Minister Mari Kiviniemi said.
Portugal will need about 15 billion euros to 20 billion euros to tide it over until the country gets a new government, Swedish Finance Minister Anders Borg said at a press conference in Stockholm today. Sweden is “very far” from having reached a decision on whether it will contribute to a Portuguese bailout, Borg said. Portugal should have acted last autumn to seek financial aid, he said.
Portugal’s 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 rose 2 basis points to 182 basis points today, and has dropped more than 100 basis points from its euro-era record in November.
Spanish Finance Minister Elena Salgado said she “absolutely rules out” contagion from Portugal as “markets absolutely distinguish between the two countries.”
“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.”
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. The ECB had “encouraged” Portugal to seek EU aid, ECB President Jean-Claude Trichet said at a press conference in Frankfurt today.
Banks led the gains on Portugal’s benchmark PSI-20 Index today, with Banco Espirito Santo SA adding 5.1 percent to 3.016 euros and Banco Comercial Portugues SA advancing 3.9 percent to 61.3 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.
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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