April 6 (Bloomberg) -- Portugal’s borrowing costs are “unsustainable” after the interest paid on an auction of 1 billion euros ($1.4 billion) of government bonds surged, Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said.
“They’ve been able to raise a bit of money, but it’s still at rates that are clearly unsustainable,” Nielsen said in an interview from London on Bloomberg Television’s “Surveillance Midday” with Tom Keene today.
Portuguese bond yields have climbed to record levels since Prime Minister Jose Socrates quit on March 23 following a parliamentary rejection of proposed budget-deficit cuts. That has fuelled speculation the country will have to follow Greece and Ireland and agree a financial rescue package with the European Union and the International Monetary Fund.
Portugal needs to resort to the financing mechanisms available in the European framework, Portuguese newspaper Jornal de Negocios reported on its website, citing Finance Minister Fernando Teixeira dos Santos.
“In Portugal right now, we’re in a stalemate with the elections coming up in some months and an inability of them to do very much about drawing up the program with EU and IMF,” Nielsen said. So it’s a matter of “day by day and getting the money in to get through these difficult months.”
Portuguese government bonds due March 2012 were sold today at an average yield of 5.902 percent, the country’s debt agency said. Portugal also sold bills due October 2011 at an average yield of 5.117 percent. Portugal paid more to borrow for six months than it costs Germany for 30-year bonds.
Portugal last auctioned 12-month bills on March 16, raising 1 billion euros at an average yield of 4.331 percent. It sold 550 million euros of six-month bills on March 2 at an average yield of 2.984 percent.
“Clearly the market knows these rates are unsustainable and rates never stay at unsustainable,” Nielsen said. “Either they come down because of something fantastic happening or they shoot up and eventually they have to go with” a financial rescue, the economist said.
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