Portugal's government blamed higher rates paid at a debt auction today on the opposition's refusal to back its latest austerity plans, warning a political standoff could force it to seek a bailout.
Pressure on Lisbon mounted after Moody's credit rating agency downgraded Portugal by two notches late last night, highlighting the challenges it faces it in riding out its debt crisis.
The yield on €1 billion of 12-month treasury bills rose to 4.331 per cent at the auction, compared with 4.057 per cent two weeks ago.
Spain, by contrast, obtained lower yields at a T-bill auction yesterday and is viewed as less and less likely to need an EU-IMF bailout following a surprisingly strong package of debt measures agreed by euro zone leaders.
The worsening financing situation for Portugal - which many economists say is the next likely euro zone country to need a bailout after Greece and Ireland - suggests the deal by euro zone leaders at the weekend to boost their rescue fund may have come too late for it.
Since then 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 yesterday 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.
So far in the euro zone debt crisis, the Social Democrats have supported the government's austerity measures and Teixeira dos Santos urged the opposition party to negotiate.
But analysts increasingly think the political standoff could lead to a collapse of the Socialist government.
"Attention has now turned to the approval or not of the economic strategy and the possibility of a political crisis," said Filipe Silva, debt manager at Banco Carregosa in Porto.
"Jose Socrates has played his last dramatic card," said daily Diario de Noticias in an editorial. "But this time it appears the Social Democrats are not ready to dance."
Since the Social Democrats now have a lead in opinion polls they may try to push the government out by making it unable to pass legislation and prompt a snap election.
The government's latest measures were announced on Friday and included cuts in spending on social welfare and infrastructure equivalent to 0.8 per cent of GDP. The plans were unveiled as Portugal's risk premiums hit euro lifetime highs last week.
Moody's cut Portugal's sovereign debt rating by two notches to A3 late yesterday and said it might have to downgrade again given the impact of high borrowing costs and the difficulty of meeting tough fiscal targets.
"The timing of the downgrade obviously didn't help as it reduced investor appetite (at the auction)," said Orlando Green, debt strategist at Credit Agricole in London.
Still, the IGCP debt agency sold all €1 billion in T-bills on offer today, with demand outstripping supply by 2.2 times. The yield at the auction of 4.331 per cent was below record levels seen in December at 5.28 per cent.
The yield on Portugal's 10-year bonds was at 7.63 per cent while the spread to safer German Bunds stood at 450 basis points, slightly up from yesterday's 446 basis points.
Reuters
