Political uncertainty in Portugal has contributed to the soaring cost of credit Photo:
While the sale of the treasury bills will provide some relief, the market still believes the country will be forced to accept a bail-out from the European Union.
"A bailout is inevitable, without a shadow of a doubt," said Alastair Winter, chief economist at Daniel Stewart & Co. "These six-month and 12-month bills are no answer, they are just treading water."
The caretaker government said the collapse of the minority Socialist administration last month had sent borrowing costs higher and caused "irreparable damage" but insisted it could still pay its debts.
Wednesday's auction saw yields on 12-month treasury bonds jump to an average of 5.9pc from 4.3pc three weeks ago, while six-month bonds climbed to 5.1pc from 3pc.
"It's a brave guy who buys Portuguese bonds at the moment, I can't imagine any pension fund manager doing it," Mr Winter added.
Portugal said Wednesday that it can meet all its financing needs and hasn't asked for any aid from the European Union, but soaring funding costs increased doubts that the government could make it through June without external aid.
The finance ministry acknowledged that financing terms have deteriorated since Prime Minister Jose Socrates resigned, as demonstrated at Wednesday's auction of EUR1 billion in short-term debt, which saw yields surging.
Portuguese banks have been among the main buyers of government debt in recent months but are becoming increasingly unwilling to add to their purchases, raising the odds that the outgoing government will have to make a formal request for a bailout from the EU and the International Monetary Fund or seek some kind of short-term bridging loan until elections are held on June 5.
The growing likelihood that Portugal will soon tap these institutions for funds comes as EU finance ministers are scheduled to meet Friday for informal talks in Hungary, which currently holds the rotating EU presidency. Although not officially on the agenda, the matter may be raised in the sidelines of this meeting and at the spring meetings of the IMF and the World Bank in Washington next week.
In separate statements Wednesday, the Portuguese government and the European Commission said Portugal hasn't requested any aid so far.
"I haven't seen, heard or sensed any sign coming from the Portuguese authorities [of a bailout request]," a spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn said Wednesday.
"The commission is ready to look into any request from any member state, but at this time the commission hasn't received any request from any additional member states," he said.
Portugal paid a high price to sell the maximum intended EUR1 billion in six- and 12-month Treasury bills Wednesday amid the prospect of significantly weaker demand after the country's banks made it clear they may stop buying government debt as the country's credit rating keeps weakening.
"Today's debt auction confirmed the deterioration of the financing conditions since Parliament rejected austerity measures presented by the government," a finance ministry spokeswoman said in a statement. But she added that the government is able to secure all the financing needed to meet its obligations.
The finance ministry said it is following the financial situation of the banks closely, together with the Bank of Portugal.
Portugal faces a rapidly dwindling array of options if it is to avoid making a formal request for a bailout. The government must repay EUR4.2 billion in debt due later this month, and EUR4.9 billion right after the elections, in mid-June. To do that, it has to continue borrowing from investors at punishing interest rates.
At Wednesday's auction, the Portuguese Treasury and Government Debt Agency was forced to pay an average yield of 5.117% on the six-month T-bills, compared with 2.984% at the previous auction March 2. The agency paid an average yield of 5.902% on the 12-month T-bills, compared with 4.331% at the last auction March 16.
The bid-to-cover ratios, which show how demand compares with the amount sold, came in at 2.3 and 2.6, respectively, indicating that there are still investors who want to provide short-term liquidity to the country.
Even as the government insisted that Portugal doesn't need any outside aid to meet its obligations, the rising yields intensified calls for some kind of emergency financing if not an outright bailout.
"A bridge loan or some loan that could keep Portugal alive until the elections would make perfect sense," an official with a local bank said.
Barclays Capital economists said in a note to clients that a bridge loan, possibly in the form of bilateral loans from EU countries, would be "the more reasonable option at this stage to help Portugal to cover its needs at least through end-June."
"This probably will require some commitment by the current government and main opposition parties to continue with the fiscal consolidation measures which were praised by EU peers at the EU Summit of March 11," the note said.
The commission spokesman said the EU and its partners are in "regular contact" with the Portuguese government about the ongoing situation as the country is in proceedings for breaking the bloc's fiscal rules.
However, "we are not discussing the activation of these mechanisms," he said, referring to the European Financial Stability Facility and the European and European Stability Mechanism bailout tools, "as there has been no formal request."
Asked about the possibility of a bilateral package arranged with other EU governments, the spokesman said this was up to individual countries.
"On other bilateral relations, I'm not excluding anything, I'm just telling you what can be done," the spokesman said.
The EU and the IMF historically don't provide bridge loans.
A German Finance Ministry spokesman said Wednesday that it isn't useful to contemplate measures to help Portugal other than through the EFSF.
"We have created this instrument, the EFSF, exactly for this kind of case. Portugal as member of the euro group is entitled to" ask for aid from the EFSF, Finance Ministry spokesman Martin Kreienbaum said.
Domenico Lombardi, a senior fellow at the Washington-based Brookings Institution and a former representative to the IMF for Italy, said the fund doesn't provide bridge loans to countries beyond its conventional lending, which comes with conditions.
A case that may most closely resemble Portugal's situation was conventional IMF financing for Brazil in 2004, arranged by the outgoing administration and approved by the incoming government. But then, the government had already been elected and had an official mandate unlike in Lisbon, where the next leaders haven't yet been voted in after the former government resigned.
Lombardi said he expects the most likely outcome is that all the relevant political parties will eventually be forced to agree on a policy framework of budget tightening as conditionality for a conventional joint EU-IMF loan, promising not to renege on its commitments.
IMF loans must be approved by the IMF board and are regularly reviewed, and if the fund believes the conditions have been abrogated, it can halt the next tranche of lending.
With the exception of Socrates, Portuguese politicians and bankers are increasingly acknowledging the urgency for the country to request outside help, with the idea of an emergency bridge loan gaining support among political parties.
For the political opposition, requesting a bailout now would give the new government time to start fresh, although with an economic agenda that would be set up by the EU and the IM
