A senior Portuguese banker has said that the European Central Bank pressed the country’s lenders to stop increasing their use of its liquidity – setting in train events that led Lisbon to ask for a bail-out this week.

António de Sousa, head of the Portuguese Banking Association, said that the message from the ECB and Portugal’s central bank not to expand their exposure to ECB funding further came a month ago. Read more

“It is necessary to refer to available funding mechanisms in the European framework.” This, grimly, from Portugal’s finance minister Fernando Teixeira dos Santos, according to Portuguese paper Journal de Negocios. Portugal is also holding talks on a bridging loan with the EU.

The news follows a punitive auction of 6-month bills today, at which the cost of debt to the government rose to 5.11 per cent, up from 2.98 per cent a month ago for comparable debt. More than €4bn longer-term debt is due to expire in April, leaving the central bank with a significant shortfall if it cannot issue new bonds at manageable levels. Today’s auction strongly suggests this would not be possible.

Answering a set of questions in writing, the finance minister said, via Google Translate:

Business: Portugal must now ask for help as they appeal the bankers and economists in general? The debt that you have to pay in a year do not worry you?

Fernando Teixeira dos Santos: The country has irresponsibly pushed a very difficult situation in financial markets. Given this difficult situation, which could have been avoided, I think it is necessary to refer to available funding mechanisms in the European framework as appropriate to the current political situation. This will require also the involvement and commitment of major forces and political institutions.

JDN: How do you assess the results of the auction today, particularly with regard to interest rates?

 Read more

Moody’s expects the next Portuguese government, due to be elected on June 5, to seek a bail-out as “a matter of urgency”, and as a result, the agency has again downgraded the sovereign’s rating. The rating now stands one notch lower at Baa1, and remains on watch for further downgrade. The rating is still two notches higher than peers S&P and Fitch, both rating the sovereign BBB-.

Portuguese sovereign ratings, which had been falling, entered a downward spiral once the government stepped down. Moody’s, which has just cut by one notch, previously cut by two on March 16. S&P downgraded Portugal two notches on March 25 and a further notch on March 29. Fitch downgraded by two notches on March 24 and a further three notches on April 1. Overall, about five notches have been taken off the rating since the start of the year. Read more

Deja vu? No, ratings agency Standard and Poors has cut Portugal’s credit rating for the second time in less than a week, this time one notch to BBB-, leaving the rating with a negative outlook. Last week the agency cut by two notches – the most it could reasonably cut, given an explicit indication that they would be “unlikely” to cut by more. The agency left the rating on negative creditwatch, but that is usually interpreted to mean a further cut is likely in three months, not three days.

Greek ratings, meanwhile, have been cut deeper into junk territory with a two notch downgrade to BB-. The rating remains on negative creditwatch meaning a further cut is likely if there is no improvement; typically, that would be within three months, but in the current climate, who knows?

In both cases, the downgrades have been prompted by the structure of the permanent eurozone rescue fund, the ESM, which was confirmed at the end of last week by eurozone leaders. Two things in particular. One is the issue of subordination Read more

The ESM term sheet claims its first casualty. As predicted, Standard and Poors rating agency has downgraded Portugal by two notches to BBB, leaving the rating on creditwatch negative, meaning another downgrade is likely within three months if there is no improvement in the country’s financial prospects. A further downgrade could place Portugal’s rating below investment grade: S&P’s rating is now just two notches above junk. But by then, the country will have passed or failed two significant tests: refinancing its debt in the markets in April and June.

S&P’s move is likely to be more significant than recent downgrades by Moody’s and Fitch. That’s because, first, S&P is leading the rating descent, having downgraded Portugal to its current Moody’s/Fitch level of A- in May of last year. (Moody’s and Fitch have only just downgraded to this level.) Second, the downgrade is significant because of timing. With a key vote on Portugal’s austerity package yet to pass and the PM stepping down, fiscal discipline will be further delayed. (This is one reason given by S&P for the move.) More than that, general elections are expected in a few months, and it would be very tempting for a new government to restructure its debt, laying the blame with its predecessors. Similar temptations must be present in Ireland.

Cast your mind back to the good old days, when a high yield meant 6 per cent and nervous market talk might culminate in whispers of a bail-out. Compare and contrast with the situation now, where two states have long since passed the point of bail-out and there is real and present danger of a default.

Much focus is on Portugal, lined up somewhat unwillingly for the next cash injection. It must make an unappealing prospect as two already-medicated patients have just taken a sharp turn for the worse. Yields on Irish bonds rose nearly an entire percentage point during trading yesterday to touch 10.7 per cent. As a reminder, Irish yields were about 8 per cent at the time of the bail-out. And it bears repeating: Irish yields are above bail-out levels even though Ireland has been bailed out. Ditto Greece.

Eurozone leaders are due to begin a scheduled meeting in Brussels about now. They’ll have plenty to discuss. A possible bail-out of Portugal will certainly be on the agenda but it might not make the top of the list. After all, Read more

Fitch has just downgraded Portugal two notches to A-, placing the rating on credit watch down, meaning that further downgrades are likely. It’s not great news for the Iberian nation, which faces increasing pressure for a bail-out as yields rise and domestic politics worsen. But the bigger ratings news is yet to happen and it is likely to come from Standard and Poors.

Fitch’s downgrade just brings its Portuguese government rating in line with those of its peers: all three main agencies now hold equivalent ratings. Moody’s downgraded Portugal two notches to A3 (=A-) about a week ago, leaving the rating with a negative outlook. S&P was quicker off the mark, lowering its rating in April 2010 and placing the rating on watch down on November 30. Read more

The night before a government debt auction, Moody’s concluded its review of Portugal with a two notch cut to their credit rating, which now stands at A3. The rating agency also left the sovereign issuer with a negative outlook, implying further downgrades are likely within two years if there is no improvement.

According to central bank forecasts, the economy will contract by 1.3 per cent this year, pushing Portugal into its second recession in three years. Citing subdued growth prospects and high borrowing costs, Moody’s actions might aggravate both issues today. Portugal is aiming to raise up to €1bn in 12-month Treasury Bills at auction and yields in the secondary market – an indication of the government’s cost of debt at auction – have risen this morning and remain near record highsRead more

Despite record yields, no bonds bought by the ECB settled last week – that’s two in a row for the eurozone central bank. The stock of ECB-bought bonds therefore remains at €77.5bn. Next week might be different, however, as demand for Portugal’s unexpectedly successful bond auction last week might have been driven by ECB purchases.

In future, buying government bonds at auction is a role that might pass to the eurozone’s rescue fund, the EFSF. A deal struck between eurozone heads of state over the weekend agrees that the fund can intervene in primary market (i.e. government debt auctions) in exceptional circumstances. This would not entirely replace the ECB’s role, as they have bought debt in the secondary (i.e. resale) bond market, too. Of €77.5bn ECB bond purchases, we do not know the split between primary and secondary debt – though anecdotally, secondary market purchases seem to have been bigger.

A look at the data on Greece and Ireland should stay the hands of policymakers keen to bail-out Portugal. If those two bail-outs were intended to reassure markets, they have failed. Clarity on bondholder rights might be a better target.

Ireland was bailed out in November. Despite knowing €85bn is on tap, markets priced Ireland’s ten year cost of debt at a record high yesterday: government bonds trading in the secondary market closed at 9.39 per cent. See green line on chart, right. (Note: this number does not affect the Irish government directly since they do not finance their loans from the resale market: it is a proxy for the rate the government would have to pay to borrow from the market at auction.) These record levels are more than a percentage point higher than levels that prompted the bail-out, and just higher than the previous record which occurred post bail-out (since yields, bizarrely, rose).

Greece was bailed out in May. But Greece’s ten year cost of debt touched a record 12.82 per cent during yesterday’s trading. Their ten year debt closed at 12.68 per cent, second only to a rough patch in January. Bail-outs are useful when there’s a temporary cashflow problem – but continued and rising market stress should tell us that something else is at play. Read more

Markets are showing signs of stress over Portugal following Moody’s three-notch downgrade of Greece as we approach a significant bond auction on Wednesday.

Yields on the ten-year government bond reached 7.65 per cent today – a euro lifetime high – indicating Lisbon would need to pay these sorts of levels if it tried to issue ten-year debt now. (Or Wednesday.) If it goes ahead, the auction is intended to raise €0.75-1bn. This is optimistic, however. The last two auctions raised just €1.25bn between them.

So, assuming Wednesday’s auction raises €0.75bn (optimistic), the IGCP will have raised about €2bn since the start of the year from the market in bonds. Rumour has it that the agency has about €4bn in cash. So that’s €6bn, excluding bills. So what does Lisbon’s debt management agency, the IGCP, need, and by when? The answers are sobering. Read more

Moody’s rating agency has just downgraded Greece’s government bonds to B1 from Ba1, placing the debt on negative outlook, meaning further downgrades are likely. The move takes Greek debt from borderline junk to “highly speculative” territory.

Fitch and S&P still rate Greek debt three notches higher at BB+ (the equivalent of Ba1, Moody’s previous rating), but this might not last long. Fitch last downgraded on January 14 and has a negative outlook on the rating, while S&P last downgraded in December but has the rating on credit watch negative (meaning a downgrade is imminent, if there is no material improvement). Read more

Bad day for Portugal. S&P has cut to junk the credit ratings of four state-owned utilities, saying the country’s sovereign debt troubles could limit the timeliness or sufficiency of help on offer from the government:

Government support for distressed state-owned companies was “increasingly constrained by difficult financial conditions”. This was also reflected in the “weak access” of Portuguese banks to external funding, S&P said. Read more

After three weeks of relative calm, the ECB was forced to re-enter the fray and buy government bonds a couple of weeks ago, as rumoured by traders. Last week, €711m bonds bought under the eurozone central bank’s securities markets programme, settled.

Rumour has it the majority of bonds were Portuguese. Yields for the 10-year bonds remain on an upward trend despite this additional demand, however. The 10-year has typically closed above 7 per cent during February, touching 7.5 per cent several times in intra-day trading in the past few days. Read more

Rumour has it Europe’s central bank has once again been buying Portuguese government bonds, to shore up demand and reassure existing bondholders. Apparently they’re buying 5-year bonds. Similar rumours flew around last week as yields topped 7.63 per cent during the day – following three weeks in which the ECB had been absent from government bond markets.

Yields on retraded – or “secondary” market – government bonds are a proxy for a government’s cost of debt. (They are not the actual cost of debt, which occurs when the government auctions debt off in the “primary” market.) Read more

Phew. Portugal can still raise money in the debt markets, €1.25bn of it today in an auction of two bonds, the 5- and 10-year. Relief all round. But the country probably had a helping hand to keep yields below the all-important 7 per cent level, despite the ECB’s public interpretation that the good result implies a market change of heart (Carlos Costa, quoted by Reuters).

Yields on the 10-year bond actually fell since the last comparable auction in November. Today the weighted average yield, which is the cost of debt to the government, was 6.719 per cent, down from 6.806 per cent in November. Surprising, perhaps. But then the bid-to-cover (demand ÷ agreed sale) picked up considerably at this auction. It has typically trailed at just under 2; today it was 3.2. It is likely some taxpayers, unwittingly, have just bought some Portuguese debt. Read more

Ralph Atkins

In the past, the first European Central Bank meeting of the year was a low-key affair. Although held in the second week of January (rather than the first week as in every other month), the Christmas and New Year holidays meant there was little fresh to say.

This Thursday’s governing council meeting will be different, of course. Since December’s gathering, inflation has risen above the ECB’s target of an annual rate “below but close” to 2 per cent, and the eurozone debt crisis has re-erupted. Read more

Chris Giles

Last week, the Swiss National Bank let it be known that it no longer accepted Portuguese sovereign debt as collateral in its open market operations. An official from the SNB said: “Only securities that fulfil stringent requirements with regard to credit rating and liquidity are accepted as collateral by the National Bank”.

The Bank of England has almost identical criteria for accepting euro-denominated sovereign bonds in its market operations. They have to be rated Aa3 or higher on the Moody’s scale or higher than that by at least two other ratings agencies and traded in liquid markets.

Portuguese and Irish sovereign bonds fail this test.  But the Bank does not apply a mechanical rule and, as its daily collateral list shows, it is still smiling on Portugal and Ireland, but not Greece. In a market notice from the time of the Greek crisis, the Bank asserts its discretion, insisting it “forms its own independent view on collateral it takes in its operations”. Read more

Portuguese and Irish government debt have again been on the ECB’s shopping list – which would appear to exclude Belgian debt, where yields are still rising. Traders report the ECB buying Portuguese and Irish debt, though there might easily be other countries. This suggests the ECB’s bond buys will rise considerably from purchases settled last week – a mere €113m.

Bond yields have been tempering in Portugal, Greece, Ireland and Italy – and also, belatedly, Spain, which bucked the trend yesterday by rising while other yields were falling. This suggests either that markets are less stressed, or that ECB purchases have been large enough and diverse enough to bring bond prices up/yields down through simple supply and demand. Read more

Ireland’s fate should be a cautionary tale to those pushing Portugal towards a bail-out. Ireland’s bail-out – arguably not needed – didn’t work.

Government bond yields – a measure of market stress – rose above 8 per cent, and Dublin found itself inundated with offers of cash. This unlimited funding should have been enough to reassure markets, but it was not, proving a cash shortage was not the problem. Politicians ignored this, and the offers became more insistent. Ireland accepted a loan, but markets were unimpressed and yields stayed above 8 per cent. A month later, yields returned above pre-bail-out levels of about 8.4 per cent. Now they are nearer 9 per cent. The Irish bail-out was misdirected, targeting the symptom and not the cause. Bond markets were worried about bondholder rights, not a cash crunch. Making cash available while remaining vague on bondholder rights was a mistake. Read more