EU bailout nears for Portugal

PORTUGAL lurched closer to an EU bailout yesterday as its largest banks were downgraded by S&P and the European Central Bank (ECB) revealed that it was forced to intervene in bond markets last week for the first time in a month.

The ECB bought €432m’s (£380.6m) worth of bonds on the secondary market, with economists suggesting that the action was an attempt to keep Portuguese yields down after the defeat of its austerity budget last week.

S&P said the downgrades on all five banks and two subsidiaries that it rates in Portugal was to reflect the two-notch downgrade on government debt. The banks affected were Banco Santander Totta, Caixa Geral de Depositos, Banco Espirito Santo, Banco BPI and Banco Comercial Portugal.

The ratings blow to Lisbon’s biggest lenders came as yields on its three-year sovereign bonds reached record highs of 8.3 per cent.

Irish banks, on the other hand, seemed to be edging closer to another rescue after reports that the ECB could agree a €35bn funding lifeline.

The results of stress tests on Ireland’s financial system are expected to reveal an imminent need for a €25bn capital injection on Thursday, but new Prime Minister Enda Kenny has been negotiating behind the scenes to secure international funding.

Irish bond yields shot up yesterday after cabinet minister Simon Coveney told the country’s national radio broadcaster that the government would push for “an element of burden sharing as well as a funding package for Irish banks” in negotiations.

Dublin’s three-year debt costs jumped to over 10.7 per cent versus under 10 per cent a week ago.

Even Germany was pulled into the storm, with its borrowing costs rising after chancellor Angela Merkel’s drubbing in regional elections, which she blamed on her stance on nuclear energy after the Japanese tsunami.

Newedge’s Bill Blain said: “She looks weak and we have to wonder who ultimately replaces her. The critical question is what any potential successor’s outlook on Germany’s role at the centre of the European bailout will be.”

Despite the political chaos, however, the euro rose due to hawkish remarks by ECB president Jean-Claude Trichet.