Yesterday’s headline story came from Portugal after European trading hours. PM Socrates threw in the towel and asked the EU for financial assistance. It was written in the stars that this moment would eventually arrive. Ever since the Irish bail-out, question marks were placed behind the sustainability of the Portuguese situation. The collapse of the minority government and the rapid deterioration of the country’s funding capabilities pushed debt-laden Portugal off the cliff straight to the bottom of the Atlantic.
Earlier on the day, a final (desperate) attempt to raise cash in the mar-kets showed the irreparable damage. In a 6- and 12-month bill auction, the Portuguese treasury needed to pay respectively 5.12% and 5.9% to sell its debt. In comparison: investors demand 5.23% to hold Spanish government paper for 10 years.
The fact that Portugal finally acknowledges that it can’t face its mounting troubles alone is a first step in the right direction but the next problem is that the outgoing government officially lacks the authority to negotiate a bail-out that would require tough austerity measures (conditionality’s attached to a EU/IMF loan), exactly like the ones shot down three weeks ago in parliament. However, desperate times call for desperate measures and we think the caretaker government, the Portuguese opposition and the EU will work out an arrangement.