Debt-stricken Portugal managed to sell a billion euros in short-term debt on Wednesday but the yields rose sharply, intensifying pressure from local lenders and ratings agencies to seek a bailout.
The sale of 6- and 12-month treasury bills brought temporary relief for the caretaker government in its effort to withstand having to request international aid as the country grapples with soaring rates, political uncertainty and rating downgrades.
But the yield on 12-month T-bills spiked to 5.902 percent from 4.311 percent three weeks ago, and on six-month bills to 5.117 percent from 2.984 percent, highlighting the precarious position ahead of big redemptions this month and in June.
I suspect that as far as the market is concerned, funding at these levels can only be viewed as a temporary measure, said Peter Chatwell, rate strategist at Credit Agricole.
Portugal's borrowing costs have soared since the minority Socialist government resigned last month after a parliamentary defeat on tougher austerity measures, casting the country into political limbo. An early general election is set for June 5.
Moody's rating agency, which cut the country's sovereign creditworthiness by one notch on Tuesday, downgraded seven local banks by one or more notches, citing concerns over both the banks' own situation and government's ability to support them.
Banking executives delivered an unprecedented warning to the government on Monday that the country's public debt crisis, and the falling value of the sovereign bonds they hold, is weakening the position of the banks themselves.
There has been a very important signal from the banks for the future, said BNP Paribas analyst Ioannis Sokos. Portugal can still make it through April, but probably won't get to June without a bailout.
EU finance ministers meeting in Budapest at the end of this week will seek clarity from the caretaker administration on what sort of support, if any, it can seek ahead of the election.
The European Commission said on Wednesday there were no discussions about releasing aid because Lisbon has not applied for assistance.
The caretaker government has said it will resist any bailout or a loan as they would impose tough conditions on the country.
Lisbon's partners are anxious lest the financing problems reach a point of no return before a new government is in place, sapping confidence in the euro zone, but they cannot for Prime Minister Jose Socrates' hand.
IMF Managing Director Dominique Strauss-Kahn told Spanish daily El Pais on Wednesday the country needs to show it is taking the right steps.
The situation is in the hands of the Portuguese government... it has to prove to its creditors that it is taking the right steps, Strauss-Kahn said.
Two business newspapers said the public social security fund has been selling overseas financial assets in the last few days to help finance the state by buying sovereign debt at auctions.
Jornal de Negocios and Diario Economico said the Social Security Financial Stabilization Fund planned to buy T-bills in Wednesday's auction. No one was available for comment at the fund.
The Portuguese banks suggested the government should seek a bridging loan, but neither the EU nor the IMF is likely to offer such temporary finance without negotiated formal conditionality.
Analysts say the high yields, which have already topped 10 percent for five-year bonds, are unsustainable. The fall in the value of the bonds also undermines its banks, who have been substantial buyers of government debt.
The rating actions follow the downgrade of Portugal's debt ratings and also reflect the weakened standalone credit profile of most Portuguese banks, Moody's said in a statement.
The banks concerned included Caixa Economica Montepio Geral, Caixa Geral de Depositos, Banco Comercial Portugues, Banco Espirito Santo, Banco BPI, Banco Santander Totta and Banco Portugues de Negocios.
Portugal has to repay over 4.2 billion euros in maturing bonds on April 15, and then another 4.9 billion euros in June. Including coupon payments and deficit financing, its requirements until June are put at 12 to 15 billion euros.
From the pure cash perspective, April should be OK, even with coupons and deficit financing, but then if the domestic bid disappears, there's not much room for maneuver, Commerzbank's Schnautz said, referring to the local banks' threats.
He expected the six-month T-bills to yield between 5.5 and 6 percent -- about double the 2.98 percent average yield in the previous auction on March 2 -- while the borrowing cost for the 12-month paper should rise above 6 percent compared to 4.33 percent in mid-March.
The October 2011 T-bill issue to be auctioned on Wednesday yielded 6.68 percent bid in the secondary market on Tuesday, but the ask yield was just 3.55 percent, making the secondary market an unreliable reference, traders said. The March 2012 issue was at over 7.5 percent bid, 4.6 percent ask.
Portugal's benchmark 10-year bond yield hit a euro lifetime record of over 9 percent on Tuesday.
(Editing by Paul Taylor/Janet McBride)