Portugal: Bail-out finance looks cheap
Here are the results of Portugal's auction of treasury bills.
Portugal has borrowed 550m euros for six months at an interest rate of 5.1% and has also borrowed 455m euros for a year at 5.9%.
This is very expensive money for a eurozone sovereign.
The interest rate on the 12-month loan is more than the 5.8% Ireland paid on average for it 7 1/2-year rescue loans from the eurozone and IMF.
And, as you know, the new Irish government is kicking up a stink that its predecessor agreed to unaffordable terms last November.
The new Irish premier, Enda Kenny, is negotiating with eurozone partners to get the rate down - lest the cost of servicing the loan traps Ireland in a vicious cycle of economic contraction.
On that basis, it would be unsustainable for Portugal to borrow such short-term money at 5.9%.
The result of Portugal's auction of treasury bills implies that investors are not convinced that they will get all their money back on the due date - they've demanded the kind of premium which implies (as a minimum) that there's a risk of a forced extension of the maturity of the loan, and that it could become subordinate to other claims on the country (such as rescue finance).
As for Portuguese politicians, the high rate for borrowing 12-month money on the market implies that any new government would be bonkers not to go for a eurozone/IMF rescue package - because it is increasingly difficult to see how a bailout could be more expensive (except in respect of national pride).
Portugal’s caretaker premier, Jose Socrates, has disclosed that his country has today asked the European Commission for financial assistance. The process for negotiating rescue loans – which could be as much as €80bn – is now underway.