Thursday, April 7, 2011

Portugal bailout

As an addendum to the post below, Portugal has asked the European Union for financial assistance. Following the rejection of tough austerity measures by the Portuguese parliament two weeks ago, forcing the resignation of Prime Minister Socrates, a bailout was the inevitable conclusion.

Importantly, funding costs have risen sharply since the rejection of the Budget with 10-year bond yields rising to 8.8% yesterday. In an auction of bonds yesterday, 1-year debt was sold at a yield of 5.9%, higher than German 30-year bonds.

Estimates are that a Portugal bailout will require about 80 billion Euro. This will likely be met out of the EFSF with contributions from the IMF (as was the solution for Greece and Ireland). These loans will come with austerity conditions.

There is sufficient headroom in the EFSF to support Portugal without having to wait for the ratification of the face-value lending capacity of the facility. We only worry about that if another country (Spain?) requires a bailout before June.

More on Europe tomorrow after the ECB meeting.