Portugal Warns of Political Crisis and Need for Bailout

With all eyes focused on Japan, it's easy to miss significant events elsewhere.

For example, the sovereign debt crisis is still unfolding in Europe, and the "agreement" in Brussels last week solved nothing even though one might not know it from looking at the Euro.

Please consider Portugal yields rise, government warns of political crisis

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 standoff could force it to seek a bailout.

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."

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.

The Portuguese, who are facing higher taxes, lower social benefits and a likely return to recession this year, have stepped up protests against austerity. But it was not clear they want a change of government.

Moody's cut Portugal's sovereign debt rating by two notches to A3 late on Tuesday and said it might have to downgrade again given the impact of high borrowing costs and the difficulty of meeting tough fiscal targets.

The yield on Portugal's 10-year bonds was at 7.67 percent while the spread to safer German Bunds stood at 456 basis points, up from Tuesday's 446 basis points. Risk premiums hit euro lifetime highs last week.

Portugal 10-Year Government Bond Yields



Yields are about 20 basis points below the levels reached last week, but these rates will sink Portugal in due time. Portugal will need a "bailout" whether or not the country gets it political act together.

However, it's important to note that is it not really Portugal that will be bailed out, but rather German, French, and UK banks (just as with Ireland and Greece).

How long these countries are willing to put up with this remains to be seen. For more on the meeting in Brussels, please see European "New Deal" Debt Agreement is Same Useless Peer Pressure Model

Not a thing has been solved. Structural problem in Europe are immense.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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