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Portugal Sets Vote to Stem Crisis as Bond Repayments Loom

Portuguese President Anibal Cavaco Silva
Portuguese president Anibal Cavaco Silva. Photographer: Francisco Leong/AFP/Getty Images

Portugal will elect its next government on June 5, just 10 days before its last bond redemption of the year, as surging financing costs threaten to push the country to the brink of requiring a bailout.

“The amount of payments to be made this year in the form of interest costs and maturing loans is quite high,” President Anibal Cavaco Silva said last night in a speech in Lisbon after calling the vote two years early. “The next government faces an unprecedented economic and financial crisis.”

Prime Minister Jose Socrates resigned on March 23 after opposition parties rejected his deficit-cutting plan that aimed to prevent Portugal from following Greece and Ireland in seeking a European Union rescue. After consulting political parties last week and former leaders in Lisbon, Cavaco Silva announced the vote after a day when yields on Portugal’s two-, five- and 10-year bonds reached euro-era records.

Portugal is already raising taxes and implementing the deepest spending cuts in more than three decades as it tries to narrow its budget gap, curb debt and bring down bond yields. The election, which couldn’t be set before the last week of May under Portuguese law, will fall between two bond redemptions, on April 15 and June 15. The maturities total 9 billion euros ($13 billion) and may determine whether Portugal can avoid a rescue.

June Maturity

Portugal’s cash balance “is unlikely to be far above 3 billion euros,” Emilie Gay, an economist at Capital Economics in London, wrote in a note to investors yesterday. “While this figure remains uncertain, it is hard to see how Portugal could cope without external support beyond June.”

The president’s consultations yesterday began hours after Portugal reported a budget deficit of 8.6 percent of gross domestic product for 2010, higher than the 7.3 percent the government had previously forecast. The EU’s statistics office, Eurostat, has required accounting changes in some countries and costs related to a 2008 bank failure were added to last year’s accounts, Finance Minister Fernando Teixeira dos Santos said.

Without the charges the shortfall would have been 6.8 percent, he said, adding that the government was still committed to trimming the gap to 4.6 percent this year.

“More important than the issue of elections is what the next austerity plan will be and how the new government will fight the deficit,” said Filipe Silva, who manages 60 million euros at Banco Carregosa SA in Oporto, Portugal.

Bonds Slump

Portugal’s two-year government bond yield fell 8 basis points 8.7 percent, after surging 75 basis points yesterday to 8.78 percent, topping the rate on the nation’s 10-year debt for the first time since 2006. The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds reached a euro-era record of 514 basis points today. The 10-year bond yield rose to a euro-era record of 8.53 percent, and the five-year bond yield also climbed to a record 9.82 percent.

“Currently accessing the European Union and International Monetary Fund loans would be far cheaper for Portugal than market financing,” Gay said. Ireland pays an average interest rate of 6 percent on its seven-year maturity bailout loans.

Portugal’s bonds are down 7.7 percent in the first quarter, the worst performance among 26 indexes tracked by the European Federation of Financial Analysts Societies.

Rating Cut

Fitch Ratings today downgraded Portugal’s debt rating three notches to ‘BBB-,’ or the lowest investment grade rating, said it maintained the “rating watch negative,” which indicates “a heightened probability of a downgrade in the near-term.”

“The severity of the downgrade by three notches mainly reflects Fitch’s concern that timely external support is much less likely in the near term following yesterday’s announcement of general elections to take place on 5 June,” Douglas Renwick, a director at Fitch’s sovereign ratings group, said today in an e-mailed statement.

Standard & Poor’s on March 29 downgraded Portugal for the second time in a week to BBB-, the lowest investment grade, saying the country will “likely access” Europe’s rescue fund. Portugal is rated lower than Ireland, which in November became the first to request aid from the European Financial Stability Facility, set up after Greece’s rescue in April 2010.

The surge in financing costs is lending urgency to resolving the political impasse to have a government in place that can seek aid if necessary.

“The government is not in condition and does not have the powers to request any type of external aid,” Teixeira dos Santos said yesterday. “The government will guarantee that there is the necessary financing for the country to face its responsibilities and honor its commitments.”

“The government is not blocked from carrying out the necessary acts to lead the country’s destiny,” Cavaco Silva said yesterday after accepting the prime minister’s resignation. “The current government will have all of my support to adopt the indispensable measures to safeguard the superior national interest and ensure the necessary financing means for the functioning of our economy.”

Extraordinary Auction

Portugal today sold 1.6 billion euros of 14-month debt due in June 2012 at an average yield of 5.793 percent, more than the 4.331 percent it paid at a sale of 12 month bills on March 16. The IGCP, as the government debt agency is known, yesterday announced the indicative amount for today’s sale was 1.5 billion euros and said it planned the “extraordinary” auction due to “specific demand” for the securities. It also announced plans to carry out bill auctions in April, May and June.

The country can meet “debt redemption commitments scheduled for 2011, especially the redemptions of long-term debt that will take place in April and June,” Secretary of State for Treasury and Finance Carlos Costa Pina said earlier this week.

Alberto Soares, the head of Portugal’s debt agency, said on March 29 that it had already carried out 36 percent of this year’s estimated issuance of medium and long-term debt. Portugal intends to sell as much as 20 billion euros of bonds this year to finance its budget and cover maturing debt.

Elections could help reduce Portugal’s borrowing costs, Costa Pina said. “The cost of financing was substantially worsened by the political crisis triggered by the opposition,” he said. “A clarification of the political situation is urgent.”

Latest Polls

Opinion polls suggest that Socrates, who leads the Socialists, will lose the election. The Social Democrats led the Socialists by 37.3 percent to 30.4 percent in a survey of voters published today on the website of weekly newspaper Expresso.

Socrates became prime minister in 2005 and his Socialist Party won re-election in 2009 without a majority in parliament. The Social Democrats agreed in October to let the government’s 2011 budget proposal pass by abstaining in parliament. Their opposition to the new austerity measures announced on March 11, which included a reduction in some pensions and cuts in tax benefits, was key to toppling Socrates.

Cavaco Silva said on March 28 that the three biggest political parties pledged their commitment to meet the current deficit targets and bring the shortfall down to the EU’s 3 percent limit in 2012.

Between 1995 and 1999, Socialist leader Antonio Guterres led the only minority government in Portugal to survive a full term since the end of a four-decade dictatorship in 1974. Portugal has been trying to avoid requesting aid for the first time since 1983, when it received external help from the Washington-based IMF.

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