Portugal Fails to Ease Bailout Concern With Spending-Cut Drive

Portugal Fails to Ease Bailout Concern With Spending-Cut Drive 
Portugal’s announcement of additional budget-cutting measures failed to ease investor concerns on whether the country will be able to avoid following Greece and Ireland in seeking a bailout.

Portugal’s 5-year bond slumped, with the yield jumping 15 basis points to 7.92 percent, more than the 7.58 percent yield on its 10-year debt, which fell for a fifth day. The declines accelerated after Finance Minister Fernando Teixeira dos Santos said European Union leaders must understand the “seriousness” of the crisis when asked whether the country would seek external aid as a presentation of the budget measures in Lisbon.

“There were some rumors Portugal would ask for a bailout and also talk of Greek restructuring,” said Chiara Cremonesi, strategist at UniCredit SpA (UCG) in London. “The fact that the government comes out with some extra measures doesn’t change the outlook drastically.”

EU leaders are meeting in Brussels today to seek to bolster the region’s temporary bailout fund and forge a permanent mechanism to try and convince investors that governments can defend the euro and insure its most debt-strapped members have access to financing. The efforts aim to stop a worsening of the region’s debt crisis and lower borrowing costs enough for Portugal and Spain to avoid having to seek emergency aid.

“Greece and Ireland have already lost market access,” Nouriel Roubini, founder of Roubini Global Economics, told Maryam Nemazee on Bloomberg Television’s “Countdown” in London today. “Portugal is a clear case of a country that’s going to lose market access.”

Default Risks

The premium investors demand to hold 10-year Portuguese bonds over equivalent German debt rose 13 basis points to 439 basis points. The cost of insuring Portuguese debt against default also gained, adding 14 basis points to 520.

When asked to respond to speculation that Portugal was poised to seek a bailout, Dos Santos indicated that the EU summits this month would influence his country’s fate.

“I don’t think it’s worth suffering in advance,” he said. “Let’s wait for those meetings to take place and I hope the European leaders understand the seriousness of the situation that we face. Above all we need to preserve the euro, ensuring its stability, and we have to do it because the euro is more than a coin, the euro is the cement that unites Europe.”

Bond Maturities

The jump in Portuguese borrowing costs comes as the country is seeking to raise funds to cover its only two bond redemptions of the year. Portugal must pay back 4.2 billion euros ($5.8 billion) of bonds next month and another 4.9 billion euros in June. If it can get over that financing hump, it won’t face another bond redemption until June of next year.

With yields on both its 5-year and 10-year debt exceeding 7 percent, the country may need to sell a new 2-year bond as early as next month because current financing costs are “unsustainable” UBS AG’s London-based interest-rate strategist Gianluca Ziglio said in an note today.

“If the option of requesting financial aid from its EU partners is rejected by Portugal, the Portuguese authorities will need to significantly increase their financing at the front end of the curve, even if the two- and three-year area of the curve has never been explicitly targeted by the country’s debt agency,” Ziglio wrote.

Deficit Reduction

The government’s additional budget cuts will allow it to trim the budget deficit from about 7.3 percent of gross domestic product last year to 4.6 percent of GDP in 2011 and to bring the shortfall within each the EU limit of 3 percent of GDP in 2012.

The additional measures, which are the equivalent of 0.8 percent of gross domestic product in 2011, 2.5 percent next year and 1.2 percent in 2013, will include a reduction in pensions of more than 1,500 euros a month. The government also plans further cuts in tax benefits, Dos Santos said said.

EU Economic and Monetary Affairs Commissioner Olli Rehn said the measures were a “significant new commitment to deficit reduction.

‘‘I welcome and support this package of far-reaching and concrete measures,’’ Rehn said in an e-mailed statement. ‘‘It’s an important strengthening of the Portuguese macro-economic policies.’’

The Finance Ministry has forecast that Portugal’s public debt as a percentage of GDP will climb to 86.6 percent in 2011 from about 82.1 percent last year. Dos Santos said has said he expects the ratio to ‘‘stabilize’’ in 2012 and to start declining in 2013.

Portugal’s austerity measures have been weighing on economic growth, making it harder for the country to expand enough to reduce its debt. The Bank of Portugal on Jan. 11 said GDP will drop 1.3 percent in 2011 as consumer demand declines and the government cuts spending. GDP fell 0.3 percent in the final three months of 2010, the first quarterly contraction in a year, the country’s national statistics institute said today.

To contact the reporters on this story: Anabela Reis in Lisbon at areis1@bloomberg.net; Andrew Davis in Rome at abdavis@bloomberg.net

To contact the editor responsible for this story: Jim Silver at jsilver@bloomberg.net