Portugal's government blamed higher rates paid at a debt auction on Wednesday on the opposition's refusal to back its latest austerity plans, warning a political stand-off could force it to seek a bailout. Pressure on Lisbon mounted after Moody's rating agency downgraded Portugal by two notches late on Tuesday, highlighting the challenges it faces in riding out its debt crisis.
The yield on 1 billion euros ($1.40 billion) of 12-month treasury bills rose to 4.331 percent at the auction, compared with 4.057 percent two weeks ago. Spain, by contrast, obtained lower yields at a T-bill auction on Tuesday and is viewed as less and less likely to need an EU/IMF bailout following a surprisingly strong package of debt measures agreed by eurozone leaders last weekend. The worsening financing situation for Portugal - which many economists say is the next likely eurozone country to need a bailout after Greece and Ireland - suggests the deal to boost the eurozone rescue fund may have come too late for it.
Portugal's plight has become yet more complicated by the fact that the main opposition Social Democrats have refused to back the government's latest austerity plans, which are aimed to ensure the country meets its budget goals. "Failure to approve the new measures in the budget plan would push the country to external help," Finance Minister Fernando Teixeira dos Santos told parliament's budget committee. "Current market conditions are unsustainable in the medium- and long-term."
A Reuters poll of 45 economists found a 60 percent chance that Portugal will need a bailout like Greece and Ireland, with the expectation that it will happen by June. Prime Minister Jose Socrates warned on Tuesday that his minority government would be unable to continue if the country's long-term economic strategy, which includes the latest austerity measures, was not passed in parliament.
"Yield levels in Portugal still trade above their snowball level - where the level of interest charged means their level of debt stock is going up - and that means that longer-term the situation, despite their best efforts, is getting worse not better," said rate strategist Charles Diebel at Lloyds Bank. So far, the Social Democrats have supported the government's austerity measures and Teixeira dos Santos urged them to negotiate. But analysts increasingly think the political stand-off could lead to a collapse of the Socialist government. "Attention has now turned to the approval or not of the economic strategy and the possibility of a political crisis," said Filipe Silva, debt manager at Banco Carregosa in Porto.