07/04/2011
By Matt Ritchie
Portugal’s application to the European Commission for a bailout should come as no surprise, and is in fact a relief to the market according to some industry observers.
Portuguese Prime Minister José Sócrates yesterday informed the president of the European Commission of the intention of Portugal to ask for the activation of the financial support mechanisms.
In a statement, the European Commission said the president has assured that this request will be processed in the swiftest possible manner, according to the rules applicable.
Director of global strategy at F&C investments Ted Scott said Portugal’s application for a bailout was not surprising, and was triggered by the unsuccessful auction of €1 billion of six month and 12 month bills that Portugal had to pay an interest rate of 5.9% to secure.
Portuguese banks have also been increasingly reluctant to buy its country’s debt and the cost of financing the deficit was spiralling upwards, Scott said.
According to Scott, a bailout in Portugal was “inevitable” due to a combination of two bond redemptions looming over the next three months, and further funding requirements of €35 billion and €25 billion to 2014 for bond redemptions and debt financing, respectively.
European fund manager at Cavendish Asset Management Caroline Vincent said that the announcement is a relief to Eurozone investors, as the unsustainability of Portugal’s situation has been apparent for some time and was already priced into markets.
“The delaying was sowing an unnecessary level of uncertainty, which yesterday’s move represents a welcome step away from. It will likely not be long until the IMF is involved, creating another layer of reassurance,” Vincent said.
However, Vincent said significant uncertainty remains, mainly with regard to the nation’s “difficult domestic political situation”.
On the question of whether Portugal’s ills will spread to other European nations, Scott said the most vulnerable country, Spain, has been more viewed with greater confidence by the markets in recent months.
The country’s export sector has been performing better, while the Spanish government has been commended for implementing reforms to tackle its fiscal debt and “ailing” banking system.
Cavenish’s Vincent said that despite Portugal’s situation the overall outlook for the Eurozone remains largely unchanged, and it is unlikely “on balance” that Spain will follow Portugal’s lead into seeking aid.
“Sovereign debt in the Eurozone is an important problem, but whilst it will weigh on the Eurozone recovery, it is unlikely to puncture it, and events in Portugal shouldn’t alter this outlook,” Vincent said.
Meanwhile, in an investment update Baring Asset Management said that its view remains “very cautious” on the prospects for the fixed income markets in most of the countries on the European periphery, and that is has no exposure to Portugal, Greece or Ireland in the Baring Emerging Markets Debt Fund, Baring International Bond Fund, Baring Global Bond Trust or its Global Aggregate fixed income strategies.
While the latest EU summit surprised investors on the upside, good work at the summit has been “undermined” by the recent developments in Portugal and by an increasing lack of co-operation from Finland, “where Euro scepticism is increasing rapidly”.
The President of the European Commission has assured that Portugal’s request will be processed in the swiftest possible manner, according to applicable rules.
The President has also reaffirmed his confidence in Portugal's capacity to overcome the present difficulties, with the solidarity of its partners.
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