A big week ahead for Portugal and the Euro

WILL this be the week that Portugal becomes the latest Eurozone country to call in the EU and the IMF to bail it out?

The answer to that question will become clear on Wednesday when Lisbon taps the bond market for the first time in 2011.

If last weeks T-Bill auction is anything to go by then yields will rise sharply but the paper will be sold.

However, the fact that the deal will be done will be beside the point. The cost of capital for Portugal has now risen to a point that is unsustainable for a country with such low growth prospects (GDP growth of just 0.5 percent is predicted in 2011). Indeed, in the secondary market 10-year paper is now trading north of seven per cent which puts Portugal into a danger zone identified by its own finance minister, Fernando Teixeira Santos.

Most economists say debt charges above 6.5 per cent create an unbearable cost. Given this, most investors are now expecting Portugal to have to take international assistance. So why is Lisbon waiting to ask for help?

The simple answer is that there are hard-to-quantify penalties for calling in the IMF and the EU and it’s likely that in the medium term the cost of borrowing for the country will be higher if aid is taken.

However, those with long memories will remember that Portugal and the IMF are well-acquainted dance partners – the fund being forced to help Lisbon out in both the 70s and the 80s.

One glimmer of hope is that the Chinese will see fit to buy enough of Portugal’s debt to keep the country afloat.

Beijing has indicated its desire to help, with the rumour mill suggesting that it might purchase €4-6bn (£3.3-£5bn) worth of paper. This, though, won’t be enough. The Portuguese debt management office has indicated that will need to sell around €20bn worth of debt this year and this is assuming that GDP doesn’t undershoot, which is a very real risk.

Consequently, most economists now expect a rescue within the first three months of the year as April sees a debt rollover of €4.5bn. May is the first opportunity for the PSD opposition party, which holds the balance of power, to call a snap election.

However talk is that it will be sooner rather than later, with chatter out of Berlin indicating that the Germans and the French are applying pressure for an early move.

This is despite concerns that Portugal’s failure will focus attention on Spain.

So whether it’s this week, this month or this quarter, the Portuguese question is likely to be at the centre of the ongoing Eurozone crisis.

Consequently, I am live in Lisbon this morning kicking off a week of special live CNBC coverage which will see my colleagues and I also reporting from Madrid, Athens, Rome, Dublin, Paris and Frankfurt.

Guy Johnson co-anchors European Closing Bell weekdays on CNBC