Portugal will seek a bailout from the European Union after the nation’s political crisis pushed borrowing costs to record levels and forced it to become the third euro-region country needing a rescue.
“I tried everything but we came to a moment that not taking this decision would bring risks we can’t afford,” Prime Minister Jose Socrates said in a televised statement from Lisbon late yesterday. “The government decided to make a request for financial aid to the European Commission.”
Portugal is aiming for a package that may be worth as much as 75 billion euros ($107 billion), two European officials with knowledge of the situation said. Bond yields have surged since Socrates offered to resign on March 23 after parliament rejected proposed budget cuts, leaving him in charge of a caretaker government with limited powers until a June 5 election.
Socrates, who leads the Socialist Party, didn’t give details on the kind of package that Portugal needs. Social Democratic Party Leader Pedro Passos Coelho said he will support the aid request. The International Monetary Fund said it stands ready to assist Portugal if needed.
The euro, which has gained 7 percent against the dollar this year, was little changed at $1.4313 as of 9:45 a.m. in Tokyo. Portuguese government bonds due March 2012 were sold yesterday at an average yield of 5.902 percent. That’s more than Germany pays for 30-year bonds.
“Financial markets have long priced in the idea of a Portuguese bailout,” said Paul Donovan, deputy head of global economics at UBS AG in London. “It has been widely anticipated by everyone except, it would seem, the Portuguese government.”
Officials may start hammering out the details of a rescue package at a meeting of EU finance ministers that starts tomorrow in Godollo, near Budapest. European Central Bank President Jean-Claude Trichet, whose Governing Council may today vote for the euro region’s first interest-rate increase since 2008 today, will also attend.
The ECB is forecast to raise its benchmark rate by a quarter point to 1.25 percent, according to the median forecast in a Bloomberg News survey, to counter inflationary pressures in the aftermath of a jump in oil and other commodity costs. The step risks deepening Europe’s sovereign-debt woes, said David Blanchflower, a former Bank of England policy maker.
“This could be another big mistake because then the cross hairs move to Spain,” which has an unemployment rate in excess of 20 percent and a housing market dominated by variable-rate mortgages, Blanchflower, a professor of economics at Dartmouth College in New Hampshire, said in an interview with Bloomberg Television. The probability of Spain needing a rescue “took a big jump upwards” after Portugal’s decision, he said.
The European Commission said the Portuguese aid request will be dealt with “in the swiftest possible manner.”
Socrates’s government has insisted for the past year that Portugal, which turned to the IMF for aid in 1983, doesn’t need help and has engaged in the deepest spending squeeze in three decades to narrow the nation’s deficit.
That didn’t stop the yield on Portugal’s 10-year government bond rising to a high of 8.804 percent this week. The premium that investors demand to hold Portuguese debt over German bunds reached a euro-era record of 544 basis points on April 5.
Portugal may initially ask for a bridging loan to bolster its finances until a new government has been formed, said David Keeble, head of interest-rate strategy at Credit Agricole Corporate & Investment Bank in New York.
“The full package would have to wait until after the elections,” he said. A spokeswoman at Socrates’s office in Lisbon declined to comment on what form of aid the government will request.
Portugal is the latest country to seek an EU-led bailout after Greece sparked a sovereign-debt crisis that threatened to splinter the euro region a year ago and engulfed Ireland in November. The IMF contributed to both.
While Spain is also trying to cut its deficit, Portugal’s announcement is unlikely to spark a new wave in the crisis, said Tullia Bucco, an economist at UniCredit SpA in Milan.
“The market was already pricing in the fact that Portugal would have been forced to ask for external aid,” said Bucco. “I don’t see major risks of contagion.”
Portugal has struggled to convince investors it can avoid a bailout partly because its economy has barely grown in the past decade. It has expanded at an average annual rate of less than 1 percent in the period, ranking among Europe’s weakest growth rates. Unemployment rose to 11.1 percent in the fourth quarter, the highest level since at least 1998, as the economy contracted for the first time in a year.
Portugal reported a budget deficit last week equal to 8.6 percent of the 2010 gross domestic product, higher than the 7.3 percent the government had previously forecast.
Portugal’s credit rating was cut by Moody’s Investors Service for the second time in three weeks on April 5, taking it to Baa1. That’s the same level as Ireland, Russia, Mexico and Thailand.