Politeía Digest

Quis custodiet ipsos custodes?

Portugal in Market’s Hot Seat

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By Marcus Walker

The euro zone’s debt crisis is entering a new phase after a brief Christmas lull as Portugal struggles to persuade investors to buy its bonds and other European governments step up pressure on the country to seek an international bailout.

Portugal hopes to raise new funds in a bond auction on Wednesday, despite a market sell-off in recent days that pushed the interest yield on Portuguese 10-year bonds above 7% Friday, the highest level since the euro’s creation. Economists said such high borrowing costs are unsustainable for the country, which is struggling to rein in its high debts amid chronically low economic growth.

Among Lisbon’s challenges in selling bonds this week is a heavy debt-issuance calendar in which many other governments are also offering safer euro-denominated investments. Failure to attract enough investor interest would signal that Portugal has effectively lost access to capital markets, forcing the country to seek aid.

Other European Union countries including Germany and France have for weeks been urging Portugal to apply for rescue loans from the joint EU-International Monetary Fund bailout facility, according to European officials. Portugal’s government continues to insist publicly that it doesn’t need help and that its steady progress in cutting its budget deficit will win investors’ confidence.

So far, the EU’s deliberations over Portugal haven’t reached the intensity seen ahead of the Greek and Irish rescues, a senior official said. That could change quickly, however, should Portugal’s borrowing costs continue to rise. Euro-zone finance ministers are set to meet Jan. 17, by which time the market’s appetite for Portuguese debt should be clear.

Under the rules of the European Financial Stability Facility, set up in the summer following the €110 billion ($142 billion) bailout of Greece, aid may flow only if a country applies for help. Ireland became the first country to apply for help from the EFSF late last year, receiving a loan package valued at €67.5 billion from the fund as well as the IMF and other official sources. Ireland’s government applied for aid only after pressure from the European Central Bank, which threatened to cut off emergency funding for Irish banks.

European officials believe the Portuguese government under Prime Minister Jose Socrates is so far refusing to apply for aid because doing so would be a humiliating signal of political failure, and would force the country to accept tough austerity policies imposed by Brussels and the IMF. Portuguese politicians observed how Ireland’s bailout humiliated the country’s leaders in the eyes of their own voters, forcing the Irish government to call early elections. Read more in The Wall Street Journal.

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Written by Theophyle

January 10, 2011 at 9:24 am

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