Portugal seeks bailout and becomes 3rd victim of Europe debt crisis

Barry Hatton and Alan Clendenning, Associated Press, On Wednesday April 6, 2011, 8:30 pm EDT

LISBON, Portugal (AP) — Portugal asked for a bailout Wednesday to relieve its crushing debt, joining Greece and Ireland by becoming the third eurozone nation to seek outside help amid a bruising financial crisis.

Prime Minister Jose Socrates went on national television to announce that Portugal must take international assistance to save its rapidly deteriorating economy, after months of insisting that he would not ask for a bailout.

Socrates said his caretaker government asked “for financial help, to ensure financing for our country, for our financial system and for our economy.”

He did not say how much Portugal would seek, but analysts have predicted Portugal will need up to euro80 billion ($114 billion). That amount is bearable for Europe’s finances unless other nations — notably Spain — end up asking for help.

Portugal urgently needs the rescue because it has been forced to pay increasingly unsustainable interest rates to persuade investors to buy its debt. Banks from Spain to Germany are heavily exposed to the possibility of a Portuguese default, which would threaten the very existence of the zone.

But analysts believe a package to save Portugal will be crafted by the European Union and the International Monetary Fund. European Commission President Jose Manuel Barroso said in a statement after Socrates’ announcement that Portugal’s request “will be processed in the swiftest possible manner.”

The IMF said Wednesday night that it had not yet received a request for financial assistance from Portugal, but added in a statement that “we stand ready to assist Portugal.”

“Ideally you want it to be bigger than the maximum you need to create that confidence that this is a once-for-all bailout,” Seiver said. “They don’t want to have to come back in a year and say, ‘You know, it wasn’t quite enough.’

Portugal has one of the 17-nation eurozone’s smallest and weakest economies and has struggled for months to finance its economy amid investor fears that it is incapable of settling its debts.

Socrates announced his resignation two weeks ago after opposition parties refused to accept additional austerity measures he proposed to stave off a bailout, but he agreed to stay on as a caretaker leader until the nation holds a special election in June.

There was confusion over whether Socrates could ask for a bailout in his current post because of doubts whether Portugal’s constitution permitted an interim leader from doing so. But Socrates said in his speech that he hoped opposition party leaders would support his decision.

“This is an especially grave moment for our country,” he said. “And things will only get worse if nothing’s done.”

Other European nations have been urging Portugal for months to accept outside help in a bid to contain the continent’s debt crisis from spreading, amid market fears that the eurozone itself could break apart if it didn’t.

The biggest risk for investors is Spain, which has the zone’s fourth largest economy and could be too big to bail out. Economic conditions in Spain are especially grim — with one out of every Spaniards out of work — but analysts generally agree that the government has recently put in place enough austerity measures to prevent the country from turning into the next bailout victim after Portugal.

Dan Seiver, finance professor at San Diego State University, said he doesn’t expect that a Portuguese bailout, which was anticipated by many, is going to make it any more or less likely that Spain will ask for a bailout of its own.

“The Spanish debt burden is not as high as some of these other countries and the economy has presumably better growth prospects, so there’s still this hope that Spain will not need a bailout,” he said.

He also said he doesn’t expect the debt crisis to spread, but notes that the real test will be whether Spain’s cost to borrow money goes up, specifically rates on 1-year and 10-year bonds.

“If those numbers don’t really change, then the market is saying ‘We don’t see any spillover,'” he said.

Portugal’s troubles are rooted in a decade of measly growth averaging only 0.7 percent a year while it simultaneously amassed huge debts to finance social programs and government expenses to give the Portuguese benefits similar to their richer European neighbors.

Investor were not convinced that the moves were sustainable, and their fears amplified over the last six months as buyers of Portuguese bonds increasingly demanded higher returns to buy the nation’s debt amid predictions Portugal will enter into a double-dip recession.

The yield on Portugal’s 10-year bonds hit the unsustainable level of 8.54 percent Wednesday before Socrates made the bailout announcement, up from 5.8 percent a year ago.

The resignation of Socrates’ government left the nation without a fully operating administration, amplifying market fears. Two ratings agencies subsequently downgraded Portugal’s bonds to just one notch above junk level in recent days, triggering widespread alarm across Europe.

Portugal managed to raise about euro1 billion ($1.43 billion) in a Treasury bill sale Wednesday before Socrates made the bailout announcement, but investors demanded record interest rates.

The bailout request came as Portugal’s biggest banks announced they will no longer buy national debt as they deal with their own liquidity problems amid heavy assistance from the European Central Bank.

Amid tightened financing, predictions abound that Portuguese companies may face difficulties making their payrolls. And Portugal’s unemployment rate last year reached a record 11.2 percent, with gloomy prospects of any relief for job seekers.

Clendenning reported from Madrid. Associated Press Business Writer Alex Veiga in Los Angeles contributed to this report.

Source: Yahoo finance

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