Portugal stocks up on aid plea but outlook unclear

By Barry Hatton

Associated Press

Published: Thursday, April 7 2011 7:19 a.m. MDT

A stands by the closed gate of a subway station at Lisbon's Cais do Sodre public transport hub during a subway workers strike Thursday, April 7, 2011. Portugal asked for a bailout Wednesday to relieve its crushing debt, joining Greece and Ireland by becoming the third eurozone nation to seek outside help amid a bruising financial crisis. Sign on the gate reads "Due to strike, the subway is closed".

Francisco Seco, Associated Press

LISBON, Portugal — Portuguese stocks enjoyed one of their best days in months on Thursday after the debt-stressed country's long-anticipated plea for a bailout, but political and economic uncertainties kept borrowing costs punishingly high.

Portugal's financial plight is pressing, and though there were few signs that the debt jitters were spreading to other weak countries like Spain, a misstep could complicate European efforts to stamp out the sovereign debt crisis.

Though stocks rallied, the interest rate on Portugal's 10-year bonds barely budged Thursday from 8.5 percent — an intolerable level maintained since the end of last month — as investors remained wary of the country's fate despite the prospect of a multibillion-euro cash injection.

It was unclear how much Portugal would get in a bailout, when it would get the cash and under what terms. The country is being run by a caretaker government ahead of a June election, making it unclear who will be in charge for the next four years. Added to that, Portugal is forecast to enter a double-dip recession this year, denying it the growth it needs to raise cash and pay back any rescue loan.

The country's European partners have long pressed it to accept help, and some were angry that Lisbon left the bailout request so late.

"There is so much obscurity in this and there are so many things that have been handled badly, so first these things have to be sorted out," Sweden's Finance Minster Anders Borg said.

"In this difficult situation, we will end up with complex and arduous solutions, because it isn't possible to create a complete program if you don't have a government and instead it will be about forming different bridge solutions," Borg told reporters in Stockholm. "This means they have put the surrounding world in a very awkward situation."

Portugal is one of the eurozone's frailest economies and one of its poorest countries, and a steep rise in its borrowing costs over the past year has made its financial situation unsustainable. Two rating agencies downgraded its bonds to one notch above junk level in recent days.

That deterioration, which raised the specter of bankruptcy, forced Portugal to announce late Wednesday it is following Greece and Ireland into asking for aid from Europe's bailout reserve and the International Monetary Fund.

Jeremy Batstone-Carr, an analyst at Charles Stanley & Co., said the risk remains that Portugal could soon default.

"The difference is that unlike Greece and Ireland, Portugal is, to all intents and purposes, already bankrupt and has no government to manage either the loan or the austerity program. This takes the peripheral eurozone crisis to another level," he said.

Analysts predict Portugal will need up to €80 billion ($114 billion) — equivalent to about half its annual gross domestic product.

The European Commission, eager to stamp out any sign of a flare-up in the continent's debt woes, said it would act swiftly on any bailout request from Portugal. RBS European Economics said it expected Lisbon to receive a first lump sum by the end of May.

Authorities need to move quickly. Portugal has to repay a €4.5 billion loan that falls due next week, though analysts expect it can meet that. Then it must come up with almost €7 billion to roll over a bond and make interest payments in June. Meanwhile, it still needs to collect funds to keep the country running.

There was good news, though, for Portuguese banks which have taken the brunt of the investor flight from Portugal and have had to rely heavily on liquidity assistance from the European Central Bank. Their stock prices surged by more than 4 percent, helping the main Lisbon index rise 1.6 percent — making it one of Europe's best performers.

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