Portugal bonds lower after Socrates bailout threat

Lisbon: Portuguese bonds fell after Prime Minister Jose Socrates raised the spectre of needing a bailout and Moody's Investors Service cut the country's debt rating.

The yield on ten-year debt rose 3 basis points to 7.44 per cent and the spread, a measure of risk, widened 2 basis points to 429 more than comparable German bunds.

"Market participants have strong concerns about the ability of Portugal to continue meeting its funding needs," Valentin Marinov, a senior currency strategist at Citigroup Inc in London, wrote in a note to clients.

"The expectation of potential bailout could erode further the demand for the debt of the Eurozone member state going forward."

Opposition lawmakers' resistance to additional budget cuts announced last week to meet deficit targets threatens a "political crisis," Socrates said late yesterday in Lisbon.

"The consequence of a political crisis is the worsening of the financing risks of our economy and would lead Portugal to request external intervention."

Deep cuts

Portugal is fighting to avoid following Greece and Ireland in seeking a rescue. Socrates is raising taxes and implementing the nation's deepest spending cuts in more than three decades, aiming to convince investors it can narrow its pay its bills on its own.

Portugal's credit rating was cut two steps by Moody's Investors Service yesterday to A3, four steps from so-called junk status, with the outlook on the grade "negative."

The rating company cited Portugal's "subdued growth prospects" and "implementation risks for the government's ambitious fiscal consolidation targets."

"The rating agency also notes that the commitment to fiscal consolidation shared by both leading political parties is an important reason why Portugal's rating remains within the A range," Moody's said.

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 in parliament by abstaining.

The Portuguese debt agency plans to sell today as much as €1 billion (Dh5.14 billion) of 12-month bills. Borrowing costs increased at a March 9 auction of €1 billion of two-year bonds, which were sold at a yield of 5.993 per cent, up from 4.086 per cent at a previous auction of the same-maturity debt on September 8.

Portugal intends to sell as much as €20 billion of bonds this year to finance its budget and cover the cost of maturing debt.

Portugal faced bond redemptions next month and in June totalling about €9 billion.

It faces bill maturities in March, July, August, September, October and November.

Finance Minister Fernando Teixeira dos Santos on March 11 presented additional deficit-cutting measures equal to 4.5 per cent of gross domestic product over the three years through 2013, including a reduction in pensions of more than €1,500 a month and further cuts in tax benefits.

The additional measures were presented hours before European Union leaders agreed to allow the region's temporary bailout fund to tap the entire €440 billion of lending capacity and to enable the rescue fund to buy bonds directly at issuance from debt-swamped governments.

The Portuguese government is already trimming the wage bill by 5 per cent for public-sector workers earning more than €1,500 a month, freezing hiring and raising value-added sales tax by 2 percentage points to 23 per cent to help narrow a deficit that amounted to 9.3 per cent of gross domestic product in 2009, the fourth-biggest in the euro region after Ireland, Greece and Spain.

Deficit target

Portugal will report a 2010 budget deficit equivalent to 7 per cent of GDP or less than 7 per cent, narrower than the 7.3 per cent gap the government had forecast, Socrates said on January 28. The government has set a target for a budget deficit of 4.6 per cent of GDP in 2011, and aims to reach the EU limit of 3 per cent in 2012.

The Bank of Portugal on Jan. 11 said GDP will shrink 1.3 per cent in 2011 as consumer demand drops and the government cuts spending. GDP contracted 0.3 per cent in the final three months of 2010, the first quarterly contraction in a year.

Portugal's unemployment rose to 11.1 per cent in the fourth quarter, the highest since at least 1998.