ECB gives Portugal temporary lifeline

The European Central Bank threw Portugal a temporary lifeline on Monday by buying up its bonds, traders said, as market and peer pressure mounted for Lisbon to seek an international bailout soon. A senior eurozone source said on Sunday that Germany, France and other eurozone countries were pushing Portugal to seek an EU-IMF assistance programme, following Greece and Ireland, to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area.
The Reuters report drew official denials from German Chancellor Angela Merkel on down, but economists and market analysts said it was only a question of time before Lisbon too would need a rescue. "We never pushed countries into doing something and we will not do this either," Merkel said on a visit to Malta. States would have to decide for themselves whether they required help, she added.
The interest rate premium on Portuguese sovereign debt fell back on Monday after rising sharply late last week as traders said the ECB intervened to buy government bonds on the secondary market. One trader said the ECB appeared to be buying Greek and Irish bonds too. EU sources say the central bank has not yet bought Spanish government debt.
The ECB has bought 74 billion euros ($95.53 billion) in troubled eurozone sovereign bonds since it began intervening to stabilise the market last May. Last week's purchase of 113 million euros was the smallest since October. But even at their peak, ECB purchases have only bought a short-term respite from market pressures.
The euro fell to a four-month low against the dollar and European shares also fell sharply, giving back some of last week's gains, as worries about the debt crisis returned to centre stage ahead of this week's bond auctions. One senior eurozone source told Reuters on Sunday that Lisbon would need between 50 billion and 100 billion euros ($64.5-$129.1 billion) in loans, similar to Ireland, which accepted an 80 billion euro EU-IMF rescue in December.
Economists said high-deficit Portugal, with a stagnant economy that has lost competitiveness since joining the euro area, was inching inexorably towards seeking aid. "If market spreads keep rising, Portugal has little chance of escaping a bailout," said Laurence Boone, research director at Barclays Capital in Paris. Deutsche Bank economists Gilles Moec and Marco Stringa said in a note that the Lisbon government would have to significantly "over-issue" debt in the first four months to avoid a sharp deterioration in its cash position while Portuguese banks will face a peak in their refinancing needs in January and February.
"It would be rational for Portugal to call for external help sooner rather than later," they said. Portugal and Spain return to bond markets this week for the first time in 2011. The result of Lisbon's auction of 1.25 billion euros in five- and 10-year bonds on Wednesday could tip the country towards seeking an early bailout if yields soar, IHG-Global Insight economist Diego Iscaro said.
European finance ministers are due to consider a more comprehensive response to the debt crisis at their next monthly meeting on January 17-18. A German finance ministry spokeswoman said Portugal was not on the agenda, but the eurozone source said informal exploratory talks had already begun. The most contentious item on that agenda is the strengthening of the financial backstops because of German resistance to increasing the size of the 440 billion euro European Financial Stability Facility, EU sources say.