ECB bond buying gives Portugal breathing space

City A.M. Reporter
THE European Central Bank has thrown Portugal a temporary lifeline by buying up its bonds, traders said, as pressure mounted on Lisbon to seek an international bailout.

Germany, France and other eurozone states have been pushing Portugal to seek EU-IMF assistance, following Greece and Ireland, in a bid to prevent contagion spreading to the eurozone’s fourth-biggest economy, Spain.

The interest rate premium on Portuguese sovereign debt has fallen after rising sharply late last week, as traders said the ECB intervened to buy government bonds on the secondary market.

"They're buying five-years and ten-years in Portugal, whatever people are offering really," one trader said.

Another trader said the ECB appeared to be buying Greek and Irish bonds too. EU sources say the central bank has not yet bought Spanish government debt.

The euro zone source said Lisbon would need between €50bn (£41.5bn) and €100bn in loans, similar to Ireland, which accepted an €80bn EU-IMF rescue in December.

German Finance Minister Wolfgang Schaeuble denied that Berlin was pushing anyone to seek assistance, but said it was defending the euro.

Spanish Economy Minister Elena Salgado said Portugal did not need to apply for aid because it was meeting its commitments to reduce its budget deficit.

The European Commission said no discussion was currently under way on assistance for Portugal or any other country.

But economists and market analysts said it was widely regarded as only a matter of time before high-deficit Portugal, with a stagnant economy that has lost competitiveness since joining the euro area, had to seek aid.

"If market spreads keep rising, Portugal has little chance of escaping a bailout," said Laurence Boone, research director at Barclays Capital in Paris.