Portugal missed its 2010 budget-deficit goal
EVENT DATED: 31st March 2011
Portugal missed its 2010 budget-deficit goal and had been forced to revise previous-year figures, a blow to market confidence in the country's fiscal management.
Amid the deepening financial crisis, President Aníbal Cavaco Silva set June 5 as the date for early elections, in a move to help lower political uncertainty.
The country is facing a deep financial, political and social crisis that will require a majority government.
Mr. Sócrates will act as caretaker prime minister until a new administration takes over. As Portugal's thin cash reserves and record financing costs push the country closer to a potential bailout, the prime minister has fiercely resisted pressure to follow in the steps of rescued EU members Greece and Ireland.
Portugal's official statistics agency said that the budget deficit stood at 8.6% of gross domestic product in 2010. Its target had been 7.3%. The deficit recalculation came after European Union statistics agency Eurostat said Lisbon needed to include a €2 billion ($2.83 billion) cash injection into nationalized Banco Português de Negócios and to recast loans to unprofitable mass-transport companies. Those loans are threatened with default and shouldn't be regarded as assets, Eurostat said.
Without the changes, the deficit would have been 6.8% of GDP, a figure the government has backed for months.
Portugal has been facing increased pressure to request a bailout, with some market watchers wondering if the country can reduce big budget gaps in time to avoid having to restructure its debts. After Ireland and Greece sought aid last year, Portugal became the next casualty of the euro zone's government-debt crisis.
Late Thursday, Portugal surprised markets by announcing that it would hold an extraordinary debt auction Friday to raise up to €1.5 billion. Saying it was "due to specific demand," the Treasury said it will hold an auction Friday morning of bonds maturing in June 2012.
The agency had said that it would issue government bonds in the second quarter, either through regular or extraordinary auctions, subject to market conditions. It also said it will continue to explore issuance opportunities through alternative funding instruments.
After the deficit revision, the finance ministry said it would meet its debt repayments but conceded that the situation has become worse than a week ago. The country has to make around €9 billion in bond repayments between April and June, but market participants are worried the government won't be able to cover all those payments given a surge in borrowing costs to unsustainable levels. Market participants expected the government have to request a bailout in the near term to deal with unsustainably high borrowing costs.
The political vacuum has unsettled investors.
The International Monetary Fund reiterated that Portugal hasn't requested any financial assistance from the IMF.
European policy makers have given Portugal and other highly indebted countries until 2013 to lower their budget deficits to the 3%-of-GDP limit set for euro-zone members.
The government had said it would seek to raise up to a total of €7 billion via Treasury bill sales, starting with an auction of up to €1 billion of six- and 12-month T-bills on April 6.
Portugal hasn't said how much cash it currently has on hand. It had €2 billion in cash at the end of 2010.
MOODY’S DOWNGRADES PORTUGAL
EVENT DATED: 05th April 2011
Moody’s Investors Service on Tuesday delivered the latest in a series of ratings-agency downgrades to Portugal’s government bonds, citing fears the country will have difficulty meeting its deficit-reduction goals and underlining expectations the country will be forced to seek a bailout.
Moody’s said it sees increased political, budgetary and economic uncertainty in Portugal. The country’s minority government recently fell apart after failing to win support in parliament for a fourth round of austerity measures, setting the stage for a June 5 general election.
Moody’s cut Portugal's rating by one notch to Baa1 from A3 and put the rating on review for a possible further cut. The move comes after Moody’s cut Portugal’s rating by two notches last month.
“Moody’s believes that the government’s current cost of funding is nearing a level that is unsustainable, even in the short term. A critical part of the review will focus on the ability of the government to secure financing at a less elevated level, either through the capital markets or through [European Union] support,” Moody’s said.
The way the Portuguese bond yields soared to unsustainable levels, signaled a speculation that Lisbon will eventually be forced to follow fellow euro-zone members Ireland and Greece in seeking an international bailout in order to meet its funding needs.
In the wake of the downgrade, the cost of insuring Portuguese government debt against default through credit default swaps topped the cost of insuring Irish government debt for the first time since August.
Portugal also recently announced that its budget deficit was 8.6% of gross domestic product last year, above the government’s target of 7.3%. The 2009 deficit was revised up to 10% from a previous estimate of 9.3%.
Portgual faces a total of around 9 billion euros ($12.8 billion) in government bond redemptions in April and June.
Moody’s cited the budget revisions as a reason for the downgrade, as well as the nation’s “uncertain political outlook” and “short- and medium-term funding challenges.”
Fitch Ratings also cut Portugal’s rating by three notches to BBB-minus from A-minus. A cut by Standard & Poor’s left Portugal’s rating one notch above junk status at BBB-minus.
Portugal finally asks EU (EUROPEAN UNION) for help
EVENT DATED: 06th April 2011
Portugal’s Prime Minister, Jose Socrates, told the nation that the assistance was “inevitable” after parliament rejected an austerity plan.
Portugal has joined Greece and Ireland in receiving bailouts from the European Union and the International Monetary Fund.
The country faces around €4.3 billion ($6.2 billion) of bond redemptions in April, followed by a repayment of €4.9 billion in June. It’s unclear how much cash Portugal has on hand, but it can’t afford June’s repayment.
The total bailout may reach €80 billion, compared to the €85 billion Ireland received and €110 billion for Greece.
Ratings agencies have slashed Portugal’s sovereign-debt ratings within a whisker of junk status, following the minority government’s inability last month to pass a fourth round of austerity measures. The government also missed its 2010 deficit target.
Domestic financial institutions hold around 14% of Portuguese government debt. Other residents, including pension funds, hold 19%; the European Central Bank holds 17% through the Securities Market Program. Other nonresidents hold about 50%, of which euro-zone banks hold 18%.
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