Portuguese Bonds Drop as Prime Minister Quits Over Budget Cuts

Portugal's Prime Minister Jose Socrates
Portugal's Prime Minister Jose Socrates tended his resignation after parliament rejected plans to cut the budget deficit during a vote in Lisbon yesterday. Photographer: Francisco Leong/AFP/Getty Images

Portuguese notes tumbled, leading declines in Europe, as the resignation of Prime Minister Jose Socrates stoked concern the government is moving closer to seeking a bailout.

Two-year Portuguese yields reached the highest since 1999 amid concern the country may struggle to repay about 9 billion euros ($12.7 billion) of debt due by June. Portuguese bonds stayed lower after Fitch Ratings cut the nation’s long-term foreign and local currency rating to A- from A+. Greek bonds declined, while German bunds were little changed.

The resignation is “another nail in the coffin in terms of a bailout package,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “This may be another underlying burdening factor. It doesn’t seem to be the case that you can say that the possibility of default is off the table.”

The yield on Portugal’s two-year note jumped 10 basis points to 6.71 percent as of 4:50 p.m. in London, and reached 6.89 percent earlier. The 10-year yield advanced three basis points to 7.66 percent, leaving the difference in yield investors demand to hold the securities instead of German bunds two basis points higher at 442 basis points. It earlier reached 450, the most since November.

Irish bonds rebounded after falling when LCH Clearnet Ltd., Europe’s largest clearing house, said it will raise the extra deposit charged to trade Irish securities.

Credit-Default Swaps

Portugal’s President Anibal Cavaco Silva said yesterday he will meet the main parties on March 25 and the government will retain its powers until he accepts Socrates’s resignation. The vote came hours before European Union leaders meet in Brussels to sign off on measures aimed at drawing a line under the region’s sovereign debt crisis.

Fitch said it may make further credit downgrades to Portugal, which has already raised taxes and implemented the deepest spending cuts in more than three decades to convince investors it can reduce its budget shortfall.

The cost of insuring Portuguese government debt jumped 17.5 basis points to 552, the highest since it closed at a record 555 on Jan. 10, before retreating to 535, according to CMA.

A bailout for Portugal may total as much as 70 billion euros, said two European officials with direct knowledge of the matter. A financial lifeline would be between 50 billion euros and 70 billion euros, according to the officials, who declined to be named because the issue is confidential. Portugal has not yet asked for a bailout. The figures remain preliminary, the officials said.

Moody’s Downgrade

Portugal’s credit rating was cut two steps by Moody’s Investors Service on March 15 to A3, four steps from so-called junk status, with the outlook on the grade “negative.”

The nation completed a sale of a 50 million-euro floating-rate note due in seven years, according to a person familiar with the deal that was done by Goldman Sachs Group Inc.

Portugal’s crisis comes as the nation braces for its first bond maturities of the year. It has 4.3 billion euros of bonds expiring on April 15 and 4.9 billion euros to be redeemed in June, said Chiara Cremonesi, a strategist at UniCredit SpA in London. It also has 8.7 billion euros of bills due by November, she said.

The Irish 10-year yield declined five basis points to 10 percent, after rising to 10.21 percent. The spread over bunds narrowed six basis points to 6.75 percentage points. It widened earlier to as much as 6.98 percentage points, or 698 basis points, the most since at least 1991, when Bloomberg began compiling the data. LCH said it will increase the extra margin required for clients to trade Irish securities to 35 percent.

Spanish Downgrades

The yield on the two-year note dropped 36 basis points to 9.89 percent, after earlier increasing to 10.38 percent.

Ireland’s economy shrank in the fourth quarter of 2010 as consumer spending, investment and exports declined. Gross domestic product fell 1.6 percent from the previous three months, when it increased 0.6 percent, the Central Statistics Office said in Dublin today.

Spanish notes fluctuated as Moody’s cut credit ratings on 30 of the country’s lenders. Citing heightened financial pressure on the country’s sovereign rating and “many weak banks,” the New York-based ratings company cut 15 lenders by two levels and five by three or four, according to a statement today. The outlook on most banks’ senior and deposit ratings remains negative, Moody’s said.

First Maturities

German bonds were little changed, with the 10-year bund yield rising less than one basis point to 3.25 percent. Yields on two-year notes were at 1.68 percent. The federal government plans to sell 83 billion euros in bonds and bills in the second quarter, unchanged from a projection in December, the Federal Finance Agency said.

Greek 10-year bonds fell for a third straight day, pushing the yield two basis points higher to 12.57 percent.

Portuguese bonds have lost investors 1.3 percent this month, extending their decline this year to 4.7 percent, while Irish bonds have lost 4 percent since Feb. 28, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek securities lost 1.1 percent this month, while German bonds lost 0.5 percent, the indexes show.

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