Portuguese Government Pleads for Help as Yields Soar to Record Level; Portugal Needs Bailout by April; Pressure Mounts for Haircuts

Portuguese government debt yields hit fresh news highs today, prompting Portugal to beg for action from the ECB. Here are charts of 5- and 10-year yields.

Portugal 5-Year Government Bond Yields



Yields on Portuguese 5-year debt have soared nearly a full point in less than a month to an all time high of 7.13% closing at 7.04%.

Portugal 10-Year Government Bond Yields



Yields on 10-year Portuguese debt have soared all time high over 7.5% before closing just under that at 7.45%

Germany Pressures Portugal to Seek Bailout

Please consider Portuguese yields under pressure

The five-year Portuguese bond yield rose to a 7.126 percent high after the Jornal de Negocios reported, without citing sources, that Germany is pressuring Portugal to request an international bailout before the European rescue package is revised in March.

"We've stabilised at these wide levels now but Portugal trades more like an emerging market bond, it's bit of a joke," a trader said. "Five-year yields are above 7 percent, wave the white flag and surrender now."

Rabobank strategist Richard McGuire compared the move to a rise in Irish yield spreads just before Dublin agreed to a bailout last November, but he said the European Central Bank was likely to purchase bonds to support Portuguese debt until March.

"Yields have now breached the self-imposed line in the sand of 7.0 percent. Further speculation over the possibility of imminent financing strains will see this continue with default risk seeing pressure move from the belly toward the front end of the curve as a near-term credit event is priced in," he said.

The Portuguese government urged Europe to respond promptly to the year-long debt crisis on Thursday, warning further delays risked exacerbating the situation and put all EU member states at risk.

Portugal Pleads For Help

Please consider Portugal govt urges Europe to respond to crisis

Portugal is doing its bit to cut the budget deficit but any delay by Europe in coming up with a comprehensive response to the euro debt crisis will damage the euro and all EU member states, Cabinet Minister Pedro Silva Pereira said on Thursday.

"Any delay of an effective European response to confront this situation (debt market turbulence) damages all the countries and the euro itself," Silva Pereira told reporters after a cabinet meeting. "That is why our message is that Portugal is doing its work. Europe also needs to do its part."

Portugal Needs Bailout by April

The crisis in Portugal has finally reached a head as Portugal seen taking bailout by April.

European Union member states are increasingly concerned about Portugal's ability to fund itself in financial markets and believe Lisbon will need to seek a bailout by April, a euro zone source said on Thursday.

The EU has discussed a rescue plan for Portugal, but it is dependent on Lisbon asking for the aid and making that request to both the EU and the International Monetary Fund. Portugal remains adamantly opposed to asking for assistance.

"Portugal is drowning, it's not going to be able to hold on beyond the end of March," the euro zone finance source said. "That's already understood to be the case in financial markets, but now it's also understood among (EU) finance ministers."

Portuguese officials have said in recent days that it is up to Europe as a whole to resolve the debt crisis, sending the message that if the EU can agree a "comprehensive package" to tackle the crisis by a summit set for March 24/25, that will help Portugal weather the pressure from financial markets.

Cabinet Minister Pedro Silva Pereira repeated that line on Thursday, saying that Portugal was doing all it could to cut its budget deficit and that it was now up to the rest of the euro zone to do its bit and agree the "comprehensive package".

Because Portugal is managing to fund itself in the markets currently, and does not suffer an acute refinancing crunch until April and then in June, sources said the immediate crisis point had not yet been reached but was drawing closer.

"We haven't yet entered the peak phase of the crisis," another EU source said.

Portuguese newspaper Journal de Negocios reported on Thursday that Germany was putting renewed pressure on Portugal to seek international help immediately.

Senior Bond Haircuts Needed and Will Come

The debt of Ireland, Greece, and Portugal cannot and will not be paid back in full and the markets know it. Yields would not be where they are if this debt was any good.

Please see yesterday's post European Sovereign Debt Crisis in Pictures; Nothing Solved Yet, Credit Stress Close to All Time Highs for a look at government bond yields in Spain, Ireland, Greece, Portugal, Germany, Belgium, and France.

So far, the ECB's primary response has been to take more of the default risk on its own plate, buying government bonds, in clear violation of the Maastricht Treaty. How long can that continue?

ECB president Jean-Claude Trichet supports those sovereign debt purchases, while German central bank president Axel Weber does not. Weber was thought by most to be Trichet's replacement, however, he resigned over the feud.

This debt cannot and will not be paid back.

The longer the ECB and IMF insist there will be no haircuts, the greater the market pressure will be to produce them. Worse yet, it's only a matter of time before there are renewed concerns about Spain, Italy, and Belgium.

Trichet's misguided approach, blessed by the rest of the ECB and also by the IMF, ensures that pressure will continue to mount until this whole mess blows sky high.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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