Monday

3rd Oct 2022

Core EU states put squeeze on Portugal to accept bail-out

  • Portuguese leader Jose Socrates and German Chancellor Angela Merkel at the EU Council (Photo: consilum.europa.eu)

Major European powers are putting the squeeze on Portugal to follow Greece and Ireland and knock on the doors of EU and IMF bail-out resources.

Reports over the weekend quote senior European sources as saying Berlin, Paris and other core eurozone capitals are leaning heavily on Lisbon to apply for a financial rescue, although the Portuguese government continues to deny that any pressure is being mounted.

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The news comes as Portugal is set to go to the markets on Wednesday (12 January) with a fresh government debt offering of €1.25 billion.

All eyes will be monitoring the sale this week, as any indication that capital markets have abandoned the country will be seen as the final straw before Lisbon is forced to seek external financial assistance.

"France and Germany have indicated in the context of the Eurogroup that Portugal should apply for help sooner rather than later," an unnamed senior EU source was quoted by Reuters on Sunday as saying.

Reports out of Germany also say Lisbon is under pressure from Berlin and Paris.

The Reuters source added that discussions on a possible Portuguese bail-out by the EU and IMF have been taking place since July last year and that Finland and the Netherlands were also of the opinion that it is time for Portugal to admit defeat.

The eurozone core fears that if a firewall is not built around Portugal, investor nervousness could spread to Spain, a much larger economy than those of the two states - Greece and Ireland - that have already been bailed out.

However, formal negotiations with Lisbon have yet to begin, the source continued, and discussions have yet to match the pace of similar talks ahead of the Greek bail-out last May or that of Ireland last November.

Should Portugal decide to ask for a rescue, the bill would amount to between €60 and €80 billion, the source said.

On Friday, the Portuguese 10-year bond yield climbed to an all-time eurozone history high of 7.193 percent, a sharp jump up from the 6.957 percent demanded by investors the day before.

On Tuesday, the government managed to raise €500 billion in six-month treasury bills but only by forking out a record 3.686 percent, up from 2.045 percent for the previous such auction.

Lisbon for its part insists that the government is under no pressure, with a government spokesman on Sunday saying the reports were untrue.

"This story has no foundations, it is false," the spokesman said.

Berlin also denied the reports.

"It is not the strategy of the German government to push Portugal to take the bailout," said government spokesman Steffen Seibert.

Lisbon argues that its stringent austerity measures have met with success in cutting its budget deficit, meeting its deficit target for 2010 of 7.3 percent of GDP, down from 9.3 percent in 2009.

Adding to the country's woes, on Friday, the Swiss central bank said that it had stopped accepting Portuguese government debt as collateral, a move that follows a similar downgrade of Irish debt.

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