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Portugal Edges Closer to Brink: Bond Yield Rises

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Although Portugal is determined to exit its financial crisis without having to follow Greece and Ireland into bailout territory, that is looking more and more unlikely, say experts, as the yield on Wednesday’s bond auction hit new highs. Unsustainable levels, say some, will lead to repayment woes as early as June.

Reuters reported that the auction saw the yield on 12-month Treasury bills spike from 4.311% only three weeks ago to a new high of 5.902% on Wednesday, and 6-month bills also soared from 2.984% to 5.117%. Peter Chatwell, rate strategist at Credit Agricole, said in the report, "I suspect that as far as the market is concerned, funding at these levels can only be viewed as a temporary measure."

Bank executives took the unprecedented step of warning the government that the crisis and the bonds’ loss of value is so serious that it is threatening some of the banks. The banks have suggested that the government attempt to get a bridge loan, but there is little expectation that either the European Union (EU) or the International Monetary Fund (IMF) will go along with such a move without negotiated formal conditions.

Ioannis Sokos, BNP Paribas analyst, was quoted as saying, "There has been a very important signal from the banks for the future. Portugal can still make it through April, but probably won't get to June without a bailout."

To add to Lisbon's worries, Moody's Investors Service delivered a one-two punch, following Tuesday's downgrade of the country's debt with a downgrade on Wednesday of seven local banks by one or more notches. It cited concerns, not just about the banks' stability, but also the government's ability to sustain them. Caixa Economica Montepio Geral, Caixa Geral de Depositos, Banco Comercial Portugues, Banco Espirito Santo, Banco BPI, Banco Santander Totta and Banco Portugues de Negocios were the banks affected.

In a statement, Moody's said, "The rating actions follow the downgrade of Portugal's debt ratings and also reflect the weakened standalone credit profile of most Portuguese banks."


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