Portugal moved closer to an international bailout as Prime Minister Jose Socrates’s offer to resign left his government in limbo on the eve of an EU summit to address the region’s debt crisis.
Two-year Portuguese bond yields reached the highest since 1999 before today’s summit of EU leaders in Brussels to sign off on measures aimed at drawing a line under the sovereign-debt crisis. The government of Socrates, who will attend the meeting, retains its powers for now before President Anibal Cavaco Silva meets tomorrow with the main parties to resolve the political crisis or call elections.
German Chancellor Angela Merkel praised Socrates today for putting “far-reaching” austerity measures to parliament, which rejected the package last night. The vote prompted him to tender his resignation and moved the nation closer to following Greece and Ireland in requiring a bailout, which Royal Bank of Scotland Group estimates at about ¤80 billion ($113 billion).
“It’s pretty inevitable” that Portugal will need a rescue, said Jacques Cailloux, a London-based economist at RBS. “The market will deteriorate in the absence of other measures going through. There is obviously the risk of further downgrades, which will become anticipated by the markets and be a self-fulfilling prophecy.”
Yield jumps
The yield on Portuguese two-year notes jumped as much as 29 basis points to 6.89 per cent at 6.34 am in New York, the highest level since the euro’s inception. The cost of insuring against a default on Portuguese sovereign debt advanced, with credit-default swaps on the nation climbing 7.5 basis points to 542, near the record of 555 reached on January 10.
Portugal has already raised taxes and implemented the deepest spending cuts in more than three decades to convince investors it can reduce its budget shortfall. Additional cuts, announced on March 11, prompted a political backlash and failed to persuade investors.
More From This Section
“I regret that there wasn’t a parliamentary majority for it,” Merkel said today, outlining her stance before the two-day summit. The proposed Portuguese cuts had been supported by the EU and European Central Bank, she said.
The spread between Portuguese and German 10-year bond yields widened 15 basis points to 439 basis points yesterday after reaching a euro-era record of 484 on November 11. It was at 448 basis points today.