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September 21, 2021

Bond markets push Portugal close to edge

Portugal’s efforts to avoid joining Ireland and Greece in reaching for European Union funds appears doomed after investors sent the cost of Portuguese borrowing to a new record on the bond markets, smh.com.au website informs. The resignation of the prime minister and a downgrade by Standard & Poor`s sent the yield on 10-year government bonds to a new high of more than 8 per cent. With EU and IMF funds available for between 5 per cent and 7 per cent, there were growing calls for the government to agree a bailout.

After a downgrade by Fitch on Thursday, S&P cut Portugal`s debt rating by two notches to BBB, warning it could lower the rating a notch once details of the EU`s permanent bailout fund are announced.

Rabobank strategist Richard McGuire said: “There is clear scope for Portugal coming under yet greater strain should the country`s politicians opt to defer requesting a bailout in favour of campaigning for a likely upcoming election.“ Markets shrugged off comments by EU President Herman van Rompuy who said European leaders gathered in Brussels had agreed to a package of measures, including a permanent bailout fund for the euro zone.

The European stability mechanism will replace the temporary fund. “We will make sure that EUR 500 billion (is available with triple-A status,“ said Mr van Rompuy. “We have agreed to ensure that the temporary facility has an effective lending capacity of EUR 440 billion. It will be in place in June.“ Six non-euro-zone countries will join the Euro Plus Pact – Denmark, Poland, Latvia, Lithuania, Bulgaria and Romania.

Portugal`s crisis intensified on Thursday when Premier Jose Socrates resigned after his austerity measures were rejected. The country must refinance €4.5 billion of debt in April, and it is dangerously close to becoming the third euro zone state in six months to ask for a bailout. “Even Moody`s, who downgraded Portugal two notches to A3 10 days ago, may have to consider further moves,“ said Gary Jenkins at Evolution Securities. “The factors that could push Portugal`s rating lower according to Moody`s are: first, the likely trend in interest rates the government has to pay to access capital markets; this box is already ticked. Second, how successful the government is in achieving fiscal targets; there must be a big question mark next to this. “And third, uncertainty over how much support the government has to provide to the banks. The latter is largely dependent upon the first two factors and will be adversely affected by the widening sovereign yields and political uncertainty,“ Mr Jenkins said.

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