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Portugal on Wednesday said it had finally decided to request financial assistance from the European Union, paving the way for a third bailout of a eurozone country after Ireland and Greece.
Analysts have said that Portugal could require a package worth 70 billion euros (100 billion dollars), compared with 85 billion for Ireland and 110 billion for Greece.
The pressures on Portugal had raised doubts about weaker eurozone members including neighbour Spain.
Having resisted pressure from the markets as well as European partners for months, outgoing Prime Minister Jose Socrates in a televised address said the request was needed after parliament rejected his new austerity programme which, he said, “aggravated in a dramatic way the country’s financial situation.”
“I am firmly convinced that that is going to be further aggravated if nothing is done,” added Socrates, who resigned on March 23 after parliament’s rejection, opening the way for new elections set for June 5.
The European Commission confirmed the move.
“The Portuguese Prime Minister Jose Socrates, today (Wednesday) informed the President of the European Commission Jose Manuel Barroso of the intention of Portugal to ask for the activation of the financial support mechanisms,” a statement said.
“The President of the European Commission assured that this request will be processed in the swiftest possible manner, according to the rules applicable,” it added.
Portuguese Finance Minister Fernando Teixeira dos Santos earlier admitted that his country would have to use EU mechanisms to resolve its debt problems.
“I believe it is necessary to have recourse to the financing mechanisms which are available within the European context,” Teixeira dos Santos said in written replies to questions submitted by business daily Jornal de Negocios.
“The country has been pushed, in an irresponsible manner, into a difficult situation on the financial markets,” the minister said, referring to the fall of the government last month when parliament rejected its austerity programme.
The International Monetary Fund (IMF) said it stood ready to assist Portugal although it had not yet received any request.
There had been mounting speculation that Portugal would need outside help to resolve its debt problems as the markets piled the pressure on, demanding ever higher rates of return to invest in new government debt instruments.
Earlier Wednesday, Portugal had to pay sky-high interest rates on its latest bond sale while insisting it would meet upcoming debt repayments and that it was not in talks on securing a bridging loan to tide it over to June 5 polls.
The treasury raised 1.005 billion euros ($1.437 billion) at the sale but the average yield, or rate of return earned by investors, jumped to 5.902 percent on the 12-month bills from 4.331 percent at the last such auction on March 16.
For the six-month paper, the rate soared to 5.11 percent from 2.984 percent.
“Portugal has once again managed to sell its debt but the rates are prohibitive,” said Filipe Silva, a strategist at the Banco Carregosa.
Portugal must repay some 4.2 billion euros ($6.0 billion) of debt by April 15 and another 4.9 billion euros ($7.0 billion) by June 15.
“While we believe that the country has sufficient funds available for next Friday’s redemption, we doubt that it is capable — at the moment — of meeting the June obligation,” analysts at Lloyds Bank Corporate Markets told Dow Jones Newswires.
Significantly, Germany, the eurozone’s paymaster, said Lisbon would only be able to approach the European Financial Stability Fund (EFSF) for help, ruling out any effort to arrange a bridging loan.
The EFSF was set up last year after fellow struggling eurozone member Greece had to be bailed out by the EU and International Monetary Fund and was used to mount a similar rescue for Ireland in November.
The finance ministry had insisted Portugal would meet its debt payments.
“The current interest rates lead to the conclusion that the damage caused by the rejection of the (austerity) plan is irreparable,” it said earlier in a statement, insisting the country was “able to meet its scheduled financial commitments.”
Moody’s Investors Service on Tuesday downgraded Portugal’s ratings by a notch from A3 to Baa1 and warned that it expected the country to have to seek outside help to resolve its debt problems.
“Pressure on Portugal to ask for external aid is mounting both internally and externally,” said Tullia Bucco, an analyst at UniCredit.
The government had earlier denied that it had launched negotiations with its European partners to obtain emergency funding.
“The information is false. These are only rumours without foundation. We deny them, there no type of contact at all,” a official in the Socrates’ office told AFP earlier Wednesday.