• 22:22
  • Thursday ,02 December 2010

Portugal denies that it needs an EU-led bail-out


International News


Thursday ,02 December 2010

Portugal denies that it needs an EU-led bail-out

The Portuguese government has reiterated that it will not require a European Union-led bail-out.Prime Minister Jose Socrates made the comments, saying that what the country needed instead was confidence in its economy.

However, speculation is growing that Portugal - struggling with vast public debts - will become the third eurozone nation to need financial support.
The EU has had to bail-out Greece and the Irish Republic so far this year.
'Expensive' bonds
The Portuguese government's latest bond auction was successful on Wednesday, but the yield it has had to offer investors has risen sharply, indicating declining confidence in country's finances.
The sale of 500m euros ($651m; £418m) worth of one-year bonds was two and a half times oversubscribed.
The yield rose to 5.3%, which BBC business editor Robert Peston said was "hugely expensive" for one-year bonds.
Bonds are effectively loans, in this case made by investors to governments.
The higher the yield of a bond at auction, the riskier investors think that loan is, so the government has to offer them a higher rate of return to ensure it attracts enough buyers.
The previous release of one-year Portuguese bonds had a lower yield of 4.8%.
While the latest auction was oversubscribed, our business editor also questioned how many of the government bonds were bought by Portuguese banks funded by the European Central Bank.
Bank fears
In Mr Socrates' interview on Portuguese radio, he said: "I do not see any reason to change the position of the Portuguese government which is very clear: we do not need any help, what we need is confidence in the Portuguese economy.


"And we need to do what we can do and should do."
Despite the continuing comments of the Portuguese government, ratings agency Standard & Poor's on Tuesday placed Portugal on credit watch because of the country's huge debts.
Portugal's central bank has also warned of the risks facing its banks.
Standard & Poor's said Lisbon may not be doing enough to enact "growth-enhancing reforms", adding that it had done "little to boost labour flexibility and productivity".
The central bank also warned the Portuguese government that the country faced an "intolerable risk" if it failed to consolidate public finances.
Portugal, which approved an austerity budget for 2011 last week, is struggling to meet its targets for deficit reduction.
Our business editor said Portuguese officials had told him it was now "not a question of if there will be a bail-out, but when".
He added that Portugal was in a "perilous" position, because Portuguese banks were lending the government billions of euros that they had borrowed from the European Central Bank.
On the bond markets, the intra-day yield on 10-year Portuguese bonds fell slightly, but remained at the historically high level of 6.85%.
The yield on German bonds - which are considered the safest in the eurozone - remained about 2.67%.
On Tuesday, the president of the European Central Bank (ECB), Jean-Claude Trichet, tried to calm nerves over high eurozone debt levels.
He said that both Greece and the Irish Republic were solvent, insisting that the eurozone economy was "functioning" and had grown by more than expected this year.
Mr Trichet said that "observers are tending to underestimate the determination of the [eurozone] governments and the EU as a whole".
His comments have raised speculation that the ECB decide to expand its government bond purchase scheme this week.
The ECB has spent 67bn euros on purchases so far, and markets are now waiting to see if the governing council announces that it is expanding the programme following its rate-setting meeting on Thursday.