The chances of Portugal accepting a bailout has increased as hopes of reining in the borrowing costs of peripheral European governments have faded.
The apparent impasse between the ECB and Germany over the purchase of peripheral government bonds not only makes it very likely that Portugal will have to accept a bail-out but also questions the policymakers’ ability to prevent the debt crisis from continuing to escalate, Jonathan Loynes, chief European economist at Capital Economics, said in a note on Wednesday.
Meanwhile, Bloomberg quoted Axa Investment Managers as saying that Portugal will accept a financial bailout “within the next few weeks” as the cost of issuing debt has become unsustainable.
“Ireland and Greece had to go for a bailout once their borrowing costs got that high, so I fully expect Portugal to go within the next few weeks,” Christopher Iggo, London-based chief investment officer for fixed income at Axa, said, according to Bloomberg.
Portuguese 10 year bond yields have been above the 7 percent level seen as a sustainable limit for some three weeks now, Loynes pointed out. Unless yields fall back soon, next month’s major bond redemption could be the tipping point for Portugal, he said.
Portugal has embraced some of the toughest fiscal tightening measures in its history to assure financial markets of its ability to bridge the budget deficit and thus avoid a Greece and Ireland-style bailout.
However, Loynes has pointed out that enough help is not coming from the European policymakers. The prospect that European policymakers would help to relieve the upward pressure on peripheral euro-zone governments’ borrowing costs through large-scale purchases of their outstanding bonds has diminished markedly over recent weeks.
He says the European Central Bank (ECB) has continued to make only minimal purchases as part of its Securities Market Programme, buying some 1.1 billion euro in the last month.
The ECB is clearly uncomfortable with the idea of increasing its unconventional support measures at a time when it is becoming more concerned about inflation pressures in the region and hence edging towards a tightening of conventional monetary policy, Loynes says.