By: Dr. Mike Campbell In a move that has come as a shock to nobody, the Portuguese caretaker prime minister, Jose Socrates, approached the EU yesterday with a request for discussions about financial assistance. The out-going prime minister had done all in his power to pass a fourth austerity budget which might have avoided the need for Portugal to ask for help, but the bill was defeated and the PM resigned, calling elections for June.
The Portuguese needed to raise money to service its existing debts, coming to the market to raise €1 billion. However, although the bond issue was successful, Portugal had to pay higher interest following the decision last week by ratings agency Moody’s to downgrade the nation’s credit rating from A3 to Baa1. The lower the rating of a bond (or nation) the greater the perceived risk of a default on the debt in question; consequently, investors demand greater interest rate to compensate them for the higher risk associated with the bond issue. Before the downgrade, last month, Portugal had to pay interest of 3% and 4% to borrow money for six and 12 months, but these rates had increased to 5.1% and 5.9% in yesterday’s bond auction respectively.
European Commission President, Jose Manuel Barosso, promised that the Portuguese request would be dealt with as swiftly as possible. There has been little reaction to the Portuguese request on the currency markets although the Euro is marginally lower against the other majors, because the bailout request was seen as being inevitable and has already been priced in. The size of the Portuguese bailout request has not yet been announced, but there is speculation that it will be of the order of €80 billion. http://www.dailyforex.com/forex-fundamental-analysis/2011/04/Portugal-Asks-For-An-EU-Bailout/7633
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