Portugal asks for a bailout

efb

Portugal requests EU bailout

Portugal's caretaker government has said it needs financing from the European Union, marking a turnaround after resisting asking for aid for months despite sharply deteriorating financial conditions.

Portugal's situation worsened last month after the government resigned, sending bond yields soaring, sparking a series of rating downgrades and a warning by local banks that they may no longer be able to buy government debt.

"I tried everything but we came to a moment that not taking this decision would bring risks we can't afford," Prime Minister Jose Socrates said in a televised statement from Lisbon this evening.

"The government decided to make the European Commission a request for financial aid." Mr Socrates, who is presiding over a caretaker government with limited powers until June 5 elections, didn't give details on the kind of package that Portugal needs.

Portuguese bond yields have surged since Mr Socrates offered to resign on March 23 following a parliamentary rejection of proposed budget-deficit cuts.

His government has insisted for the past year that the country didn't need help to meet its commitments and has engaged in the deepest spending cuts in three decades to narrow the budget deficit.

That didn't stop the yield on Portugal's 10-year government bond rising to a euro-era high of 8.804 per cent today. Portuguese government bonds due March 2012 were sold today at an average yield of 5.902 per cent. That's more than Germany pays for 30-year bonds.

The premium that investors demand to hold Portuguese debt over German bunds reached a euro-era record of 544 basis points yesterday.

"In this difficult situation, which could have been avoided, I understand that it is necessary to resort to the financing mechanisms available within the European framework," Finance Minister Fernando Teixeira dos Santos said earlier.

Portugal's Social Democratic Party, the biggest opposition group, said it will support the government's request for external aid, Pedro Passos Coelho, the leader of the Social Democrats, said tonight.

Portugal's request for EU financial help is a responsible move to stabilise the situation in the country and Europe, Economic and Monetary Affairs Commissioner Olli Rehn said.

"This is a responsible move by the Portuguese government for the sake of economic stability in the country and in Europe," Mr Rehn told Reuters. The amount of aid is to be determined shortly, he said.

Earlier today, the country issued €1 billion in treasury bills. The finance ministry said the auction was a confirmation of the deterioration caused by the rejection of the austerity measures.

The government has held out hope previously that by steadily meeting budget goals and cutting spending it could regain investor confidence and avoid a bailout.

In the latest threat to the government's resistance to seeking foreign financing, local banks warned the government on Monday that it must seek a short-term emergency loan to soothe market concerns ahead of the election, saying that under current conditions they cannot continue buying government debt.

Who's next?

Seanchai

Finally! Give me the Icelandic way rather than the Irish or Portuguese way: default straight away and cut the drama!

It's much more honest.

Spain next followed by Italy.

allthedoyles

Seanchai wrote: »

Finally! Give me the Icelandic way rather than the Irish or Portuguese way: default straight away and cut the drama!.

In hindsight , I fully agree with this

dan_d

They've bowed to the inevitable.....which takes the spotlight off us for a while.

What I want to know is how and when this is going to stop.

The markets will just turn their sights now on either Spain or Italy (depending on who is the more f&*ked), and it'll just keep on going, unless the powers that be in Europe stand up and call a halt.Somehow.

Sand

Poor old Portugal are screwed now - EU "bailouts" are like black holes. Once dragged in, nothing escapes, not even the light at the end of the tunnel.

caseyann

EU is collapsing.Their ideas are failing.

I was watching an economist talking about on tv last week,he said giant melting pot.:D

bryaner

So if the whole sh!t pit comes down how will mortgage holders fair out?

Sponge Bob

bryaner wrote: »

So if the whole sh!t pit comes down how will mortgage holders fair out?

Badly, just like everybody else, and maybe more so! The interest rate if we find ourselves with a new currency will be swingeing.

bryaner

Sponge Bob wrote: »

Badly, just like everybody else, and maybe more so! The interest rate if we find ourselves with a new currency will be swingeing.

But lets throw default into the mix no money in banks/atm's, then what how can any debt be serviced..

Dannyboy83

This is good news for Ireland.

Spain will be next and then there will be the threat of Italy

Germany/France will have to agree to a Eurobond system which they should have done from the start (alternative would be to watch the Euro collapse - which they won't do.)

dan_d

It starts.....

http://www.breakingnews.ie/world/finance-chief-spain-wont-seek-bailout-500241.html

Barely 24hours later.:rolleyes:

mgmt

dan_d wrote: »

It starts.....

http://www.breakingnews.ie/world/finance-chief-spain-wont-seek-bailout-500241.html

Barely 24hours later.:rolleyes:

yaaaaaaaaaaaaaaay


We will finally be P-I-G-S!

Spain 10 year:

Bottle_of_Smoke

Would Britain be for or against us joining Sterling?

Obviously no one likes a bankrupt state joining their currency but I could see them enjoying the eurozone being taken down a peg

mgmt

Bottle_of_Smoke wrote: »

Would Britain be for or against us joining Sterling?

Obviously no one likes a bankrupt state joining their currency but I could see them enjoying the eurozone being taken down a peg

We should have joined them 2 years ago when they started devaluing their currency. The Euro is focking insane for us. We cannot sustain 3 interest rate hikes. Small countries (Ireland, Portugal) and massive industrial powerhouses (Germany, France) cannot function with the same monetary policies.

deise go deo

mgmt wrote: »

We should have joined them 2 years ago when they started devaluing their currency. The Euro is focking insane for us. We cannot sustain 3 interest rate hikes. Small countries (Ireland, Portugal) and massive industrial powerhouses (Germany, France) cannot function with the same monetary policies.

Pardon my ignorance, but would Britain not belong on the list with France and Germany?

Oh_Noes

Bottle_of_Smoke wrote: »

Would Britain be for or against us joining Sterling?

Obviously no one likes a bankrupt state joining their currency but I could see them enjoying the eurozone being taken down a peg

Why would we leave one currency union and form another? Surely it would make more sense to adopt the US dollar if we were going to do this, but I don't think we should. We should have control of our own currency, because when we don't, we end up in this situation.

Bottle_of_Smoke

Oh_Noes wrote: »

Why would we leave one currency union and form another? Surely it would make more sense to adopt the US dollar if we were going to do this, but I don't think we should. We should have control of our own currency, because when we don't, we end up in this situation.

A few reasons.

16 soveriegn states with varying interest rate needs at varying times = insanity

2 countries, ie UK and Ireland, not quite so insane. Why not just have our own? Because it would be as valuable as monopoly money.

Ours and the Brits economies depend on each other much more than the eurozone does on the Irish economy.

Therefore if increasing interest rates would f*ck us over it would also f*ck them over, so they're going to bear us in mind a lot more than the Germans would.

If Germany wanted to increase interest rates what the **** does our economy contracting matter? Therefore they increase them.

Bottle_of_Smoke

^^what a day to post that.

ECB have increased interest rates to 1.25% but Bank of England holding at 0.5%

PatsytheNazi

Bottle_of_Smoke wrote: »

Would Britain be for or against us joining Sterling?

Obviously no one likes a bankrupt state joining their currency but I could see them enjoying the eurozone being taken down a peg

Bottle_of_Smoke wrote: »

A few reasons.



16 soveriegn states with varying interest rate needs at varying times = insanity



2 countries, ie UK and Ireland, not quite so insane. Why not just have our own? Because it would be as valuable as monopoly money.



Ours and the Brits economies depend on each other much more than the eurozone does on the Irish economy.



Therefore if increasing interest rates would f*ck us over it would also f*ck them over, so they're going to bear us in mind a lot more than the Germans would.



If Germany wanted to increase interest rates what the **** does our economy contracting matter? Therefore they increase them.

Where oh where do they get these people who like to think Britain is in a good financial state. Britain has 4.8 trillion debt for God's sake :eek:

Britain's debt forecast for 2010/11 stands at £922 billion, not including current and future pensions and other liabilities, which bring it up to £4.8 trillion.

http://www.dailymail.co.uk/home/moslive/article-1336543/Britains-4-8-trillion-debt-Brace-.html

mgmt

PatsytheNazi wrote: »

Where oh where do they get these people who like to think Britain is in a good financial state. Britain has 4.8 trillion debt for God's sake :eek:

Britain's debt forecast for 2010/11 stands at £922 billion, not including current and future pensions and other liabilities, which bring it up to £4.8 trillion.

http://www.dailymail.co.uk/home/moslive/article-1336543/Britains-4-8-trillion-debt-Brace-.html

So what? We dont get their debt if we peg to the sterling. If anything that would mean The Bank of England will keep interest rates low for the forseeable future to allow growth.

Look at what the ECB did to us:

In the late 90s/00s when we needed high interest rates to cool the economy, the focking ECB kept them low to satisfy Germany.

Now, when we need interest rates low to grow the economy in order for us to repay our debts, the ECB are increasing them to please Germany.

PatsytheNazi

mgmt wrote: »

So what? We dont get their debt if we peg to the sterling. If anything that would mean The Bank of England will keep interest rates low for the forseeable future to allow growth.

Look at what the ECB did to us:

In the late 90s/00s when we needed high interest rates to cool the economy, the focking ECB kept them low to satisfy Germany.

Now, when we need interest rates low to grow the economy in order for us to repay our debts, the ECB are increasing them to please Germany.

Because Britain's economy is nearly as much in the toilet as us or Portugal. Not much point in joining Nero playing his fiddle as Rome is burning. Better staying with Germany and France through the euro.

Bottle_of_Smoke

PatsytheNazi wrote: »

Because Britain's economy is nearly as much in the toilet as us or Portugal. Not much point in joining Nero playing his fiddle as Rome is burning. Better staying with Germany and France through the euro.

Then why are their umemployment rates significantly lower than ours?

I can't help but think the major objection to sterling is more to do with nationalistic reasons than economic. Which I could understand if we had our own currency, but seeing as we have no monetary sovereignty by virtue of being in the eurozone I really can't

Iwasfrozen

PatsytheNazi wrote: »

Because Britain's economy is nearly as much in the toilet as us or Portugal. Not much point in joining Nero playing his fiddle as Rome is burning. Better staying with Germany and France through the euro.

Britain in the same boat as Ireland and Portugal? Can I have some of what you're smoking?

PatsytheNazi

Iwasfrozen wrote: »

Britain is nearly in the same boat as Ireland and Portugal? Can I have some of what you're smoking?

Fixed for ya.

Never smoked mate. But how is Britain trying to get out of it's difficulties ? Quantitive easing - which is basically printing money and we know how that ends up. Better sticking with Germany and France.

Iwasfrozen

PatsytheNazi wrote: »

Fixed for ya.

Never smoked mate. But how is Britain trying to get out of it's difficulties ? Quantitive easing - which is basically printing money and we know how that ends up. Better sticking with Germany and France.

They're in charge of their own currency and can devalue their it whenever they want to effectively lower the cost of their own loans. Which they can easily afford to do because the pound is such a strong currency.

One thing they won't be doing though is rising interest rates in the middle of a recession! I mean what the fúck is the ECB thinking.

Sand

It appears the EU/ECB are pushing the Portuguese parties to accept a deal prior to any election so that the terms of the deal are presented as a fait accompli before the Portuguese people are consulted for their opinion.

Last month's austerity plan "is a starting point", European Union economic and monetary commissioner Olli Rehn told reporters after a meeting of European finance officials today in Hungary. "It is indeed essential in Portugal to reach a cross-party agreement ensuring that such a program can be adopted in May."

EU, European Central Bank and IMF officials will head to Lisbon next week to start negotiations over the package, with the goal of wrapping it up on May 16th, three weeks before Portugal's June 5th election.

"The package must be really strict because otherwise it doesn't make any sense," said Jyrki Katainen of Finland, one of the euro region's six AAA states. "The package must be harder and more comprehensive than the one the parliament voted against."

Id have thought the EU/ECB would have learnt even the slightest bit from their experience in Ireland. Id have sincerely hoped they would have been better than trying to ram another deal through via a government which is clearly without a mandate to make an agreement on the part of the nation. It seems clear they absolutely do not wish to deal with any government with a mandate to enter into an agreement, which is disheartening.

Its a measure of how excellently the EU/ECB has handled "bailouts" of the countries that have been forced into their embrace, that Portugals interest rates have continued climbing since it became known the EU/ECB would be involved in resolving their economic difficulties.

later12

Sand wrote: »

It appears the EU/ECB are pushing the Portuguese parties to accept a deal prior to any election so that the terms of the deal are presented as a fait accompli before the Portuguese people are consulted for their opinion.

Well firstly the caretaker government are still the current, elected government until such time as the election in Portugal occurs. However, much more importantly, there is a €5bn bond redemption and coupon payment due on April 15th, a €300m payment due this coming Monday, and a €7bn payment due just over a week after the Poruguese elections. I imagine that this is the reason why an agreement much be reached now, as the EFSF guarantors will have to raise and gather the bailout fund prior to Portugal running out of cash - and it looks like they would be unable to finance the June bond payment in particular without external assistance.

whiteonion

Iwasfrozen wrote: »

They're in charge of their own currency and can devalue their it whenever they want to effectively lower the cost of their own loans. Which they can easily afford to do because the pound is such a strong currency.

One thing they won't be doing though is rising interest rates in the middle of a recession! I mean what the fúck is the ECB thinking.

The pound is a weak currency, all paper currencies are weak.
If you measure the pound in gold, silver, cotton, oil, or copper the value of the pound(and all paper currencies) has lost a significant amount of value.

beeftotheheels

Sand wrote: »

Id have thought the EU/ECB would have learnt even the slightest bit from their experience in Ireland.

And herein lies the problem... The following is a simplified (and therefore incorrect in places) summary of where we are at.

The ECB is empowered, and obliged, under the treaties to police price stability. Trichet is a central banker, hates inflation, hates moral hazard, but understands how the markets react and so is very concerned about contagion. He's our biggest creditor (and Portugal's) which he doesn't want to be, because he agreed as an emergency measure to lend to banks against certain asset types if they couldn't source their funding elsewhere.

He intended this to be a short term measure when Lehmans shut down the Inter-bank markets, but the Irish and Portuguese banks got locked out of the money markets and so kept drawing on his emergency funding (and it is arguably illegal for him to be continuing to support them in this way).

So, he needed to get their debts off his balance sheet without bringing down the house of cards. To do this, the EFSF and EFSM were created. However, the EFSF and EFSM are not EU institutions because the last draft of the EC treaty didn't envisage them. Basically, when Greece looked like going to the wall the governments of the various member states agreed to have a whip round and create a rescue fund. Crucially, it is not an EU fund, but an international fund created by the nations who happen to be EU members. As such, the Commission cannot control it. The ECB cannot control it. Merkel, Sarkozy & co control it, i.e. the Governments of the richer Member States.

So where does that get us to. Well, at the time the euro was created, the German people were promised that they wouldn't be on the hook for any debts incurred by other "feckless" member States, and the German populace is concerned that this is what is being done through the EFSF and EFSM. Merkel is being sued in her constitutional court at home for signing up to these in breach of the German implementation of the European Treaties. She has to court the German taxpayer and electorate.

She doesn't have to court the markets, and indeed has made matters a lot worse for us in particular by talking about burning bondholders (her comments on this, which Trichet warned her not to make, are one of the reasons we got locked out of the markets). She would rather that the bondholders took the pain rather than the German taxpayers.

However, by now, the single biggest bondholder is Trichet, he doesn't want to be burnt, nor does he want a domino effect to bring down further European banking systems. So he won't allow any bondholder burning - and since he can pull the funding that is keeping our, and the Portuguese, banks alive, we have to listen to him.

He's not keeping Merkel's banks alive so she doesn't have to listen to him - if she did we might not be in this mess.

What we have is a mismatch between the level of federalization which would be required for the EU/ Eurozone to deal with this mess, and the level that we actually have. If the Eurozone was like the US with a federal government and a federal central bank then these things would be easier to resolve. But none of us voted for that!

The EU is not a federal State, nor is it a bunch of countries acting together for a specific aim, it is something in between. A new kind of being, a new kind of law, and it is just not ready to deal with a crisis of this magnitude. So mistakes are being made.

Merkel is doing her job, Trichet is doing his, we're suffering.

Until the EU moves to a point where the heads of the Member States are obliged to do more than listen to what the central banker says, until they are obliged to take his advice, until the bail out mechanisms are brought under the control of the EU through either the Commission or the ECB, this mismatch will remain.

Without a law change to alter someone's job description the EU cannot learn on this, it is trying to muddle along in laws which were never designed to deal with an event like this and those laws are constraining everyone.

whiteonion

Portugal should get nothing. I don't see why responsible countries with sound policies should bail out countries such as Greece, Ireland and Portugal. These countries should sort out their own problems.

El_Dangeroso

beeftotheheels wrote: »

Thanks for the summary, I don't know much about this but it's nice to get the simplified version. All sort of fascinating and horrifying at the same time.

Liam Byrne

Iwasfrozen wrote: »

They're in charge of their own currency and can devalue their it whenever they want to effectively lower the cost of their own loans.

Huh ?

If their loans are from other countries (and therefore payable in euro or dollar) then devaluing has no effect on the actual cost of the loan, but will ensure that MORE sterling is required to pay it back.

thebman

Having your own curency allows you to devalue so you don't have to borrow more to cover day to day expenditure for governments and let the problem of devaluing filter down later to the people which is essentially robbing their own people of their savings to pay for day to day spending.

It is essentially kicking the can down the road and hoping you don't end up with hyperinflation or other problems.

Some of their debts are probably in sterling so they can't use quantitive easing to pay these too but how that is any better than burden sharing, I'll never know as it amounts to the same thing in my mind.

sollar

caseyann wrote: »

EU is collapsing.Their ideas are failing.

Your prob right. From our perspective how would we vote now if another EU treaty was put in front of us. No, No and No again i'd say.

later12

Liam Byrne wrote: »

Huh ?

If their loans are from other countries (and therefore payable in euro or dollar) then devaluing has no effect on the actual cost of the loan, but will ensure that MORE sterling is required to pay it back.

That isn't how Government loans work.

The money is raised in UK£ at a bond auction, not borrowed from a sovereign government or a bank. The poster is correct about devaluation. The US are also somewhat fond of this policy, often referred to as a form of default.

Iwasfrozen

Liam Byrne wrote: »

Huh ?

If their loans are from other countries (and therefore payable in euro or dollar) then devaluing has no effect on the actual cost of the loan, but will ensure that MORE sterling is required to pay it back.

No, government bonds are issued in the respective governments currency so by devaluing the currency they are effectively lowering their interest rate.

This website explains it better then I can:

Not so fast. Many foreigners have purchased Russian bonds. These bonds are IOU’s that state that the Russian government promises to pay a certain amount of rubles to the holders of the bonds at some fixed date in the future. Suppose you are the IMF. Six months ago, you purchased 100 billion rubles worth of Russian bonds. At the fixed exchange rate of 100 rubles to $1, you paid $1 billion for the bonds. Let us say that the bonds yield 10% interest and come due tomorrow. You will have earned 5% on the loan. So tomorrow, you will receive a check for $1.05 billion, right. Nope. Those bonds were denominated in rubles. You will receive back your 100 billion rubles plus 5%, or 105 billion rubles. BUT, now that the government has devalued the ruble, those rubles trade not at 100 rubles to $1, but at 100 rubles to $0.75. The 105 billion rubles you receive tomorrow are worth $787 million and change. Because of the devaluing of the ruble, you just lost almost a quarter of a billion dollars -- and that is after accounting for the interest you earned. Thus, for the Russian government to devalue the ruble is tantamount to its defaulting on a portion of its debt.

Source: http://www.angelfire.com/biz/clinedavies/essay1.html

whiteonion wrote: »

The pound is a weak currency, all paper currencies are weak.
If you measure the pound in gold, silver, cotton, oil, or copper the value of the pound(and all paper currencies) has lost a significant amount of value.

By strong currency I ment one not prone to value fluctuations.

View

It should be pointed out that the UK has NOT devalued its currency. Sterling has fluctuated in a narrow enough band vis-a-vis the Euro since the financial crisis in Q4 2008 (roughly +/- 5 cent after the initial shock).

In addition, having its own currency didn't prevent the UK from having the third worst current account deficit in the EU (After Ireland and Greece) in 2009.

And, as a correspondent in the FT put it a few weeks ago, since when did the UK ever benchmark its economic performance against them (i.e. us)?

Sand

The money is raised in UK£ at a bond auction, not borrowed from a sovereign government or a bank. The poster is correct about devaluation. The US are also somewhat fond of this policy, often referred to as a form of default.

Whats intriguing about this is that its often stated that no developed economy has defaulted since WW2 (except Germany). Yet, its appears that through devaluation many have, and its been common practise - Sweden and Finland in the 1990s for example.

Of course Ireland no longer has the ability to devalue like it did itself at the dawn of the 1990s. So that means the default is going to have to be a little more honest, but it wont be extraordinary.

_Kaiser_

sollar wrote: »

Your prob right. From our perspective how would we vote now if another EU treaty was put in front of us. No, No and No again i'd say.

Would it matter? We'd just be told to do it again until we gave them the "right" answer! :rolleyes::mad:

later12

Sand wrote: »

Whats intriguing about this is that its often stated that no developed economy has defaulted since WW2 (except Germany). Yet, its appears that through devaluation many have, and its been common practise - Sweden and Finland in the 1990s for example.

Arguably but arguably again this is the (typically very small) risk that is priced into bid yields on sovereign debt for a proportionately small return. The investor must be holding some risk - necessarily - and deem that to be minimal. Investors know all about low or negative real interest rates, a lower return due to inflation and devaluation, but of course in size alone these are extremely rarely anywhere in the same league as losses incurred on sovereign default.

later12

View wrote: »

And, as a correspondent in the FT put it a few weeks ago, since when did the UK ever benchmark its economic performance against them (i.e. us)?

The answer to that is every day in the FT. I don't know who wrote such a thing, but every day the FTSS list benchmark government bonds against the UK sovereign, and compare various sovereigns' (including Britain's) spreads against two benchmarks - T-Bonds and Bunds.
The Old Lady of Threadneedle Street might not be happy about it, and the FT itself might not be happy about it, but apart, perhaps, from sovereign debt security, British economic indicators are not really benchmark indicators in the modern world.