Portugal’s debt rating cut as EU avoids bail-out talk

European leaders agreed to increase their financial rescue fund to the full €440bn (£387bn) by June, but avoided discussion of Portugal which is under pressure to seek a bailout following the resignation of its prime minister.

Having said for weeks that they would agree a “comprehensive package” to tackle the eurozone debt crisis by the end of March, the leaders ended up delaying a final decision on boosting their safety net until mid-year.

That agreement at a two-day summit in Brussels was lauded as an accomplishment by Herman Van Rompuy, the president of the European Council, but worries about Portugal’s political crisis overshadowed the meeting.

Prime Minister Jose Socrates quit on Wednesday after parliament rejected new austerity measures that he had hoped would allow the country to avoid following Greece and Ireland in needing to ask for EU/IMF financial assistance.

He is the second euro zone leader to fall victim to the rolling sovereign debt crisis after Ireland’s prime minister was booted out of office last month.

Despite stepping down, Mr Socrates came to the two-day summit and was warmly received by other leaders, diplomats said.

He resisted pressure from his peers to accept a bailout, however, and made it clear that he would hold that line, at least until a new Portuguese government is formed – probably after early elections in about two months’ time.

The fall of the government prompted Standard & Poor’s to downgrade Portugal’s credit ratings by two notches to BBB on Friday and warned it could cut it again by one notch as early as next week depending on the final shape of the euro zone bailout fund.

S&P, which followed a two-notch cut by Fitch on Thursday, said the collapse of Portugal’s government has increased political uncertainty, hurting market confidence and potentially raising refinancing risk.

Fitch cut Portugal’s credit rating to A-, saying risks to the country’s financing had risen after parliament failed to pass fiscal consolidation measures. It warned further downgrades were likely in the absence of a “timely and credible” EU/IMF support programme.

Jean-Claude Trichet, President of the European Central Bank, told reporters as he left the summit that it was crucial for Portugal to stick to the fiscal austerity measures Mr Socrates had proposed.

EU diplomats said Mr Socrates had privately reassured other leaders that no matter what sort of government emerges after new elections, it would stick to the austerity programme.

The Portuguese upheaval underscored the wealth of political obstacles the single currency bloc faces in trying to solve a debt crisis that has deepened over the past year.

Only a few days ago, the summit had been expected to deliver a full package that would reassure financial markets, but Thursday’s decisions fell short of what some investors had expected only a few days ago.

Senior eurozone officials said Portugal was likely to need €60bn-€80bn in assistance from the EU rescue fund and the International Monetary Fund.

No talks have begun yet and will anyway have to wait until a new government is formed.

Portuguese benchmark 10-year bond yields hit new highs on Thursday, climbing to 7.9pc, far above levels that economists say would allow Lisbon to service its debt long term.

Lisbon needs to refinance about €4.5bn of debt in April and a similar amount in June, which may prove a trigger for finally making the request for aid.

In Britain, Mark Hoban, the Financial Secretary to the Treasury, down played Britain’s exposure to the crisis. He told Parliament that the UK will “play no part in a proposed permanent European bail-out fund because it is not in the eurozone”.

He added that bilateral trade with Portugal was just £4bn in 2010.
Source: The Telegraph

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