When Portuguese bonds were sold at 7% interest. economists predicted that such an interest rate was unsustainable and Portugal would have no option but to request a European Union bailout.
Now. after Moody's Investment Service has further downgraded Portuguese debt to the level of junk bonds. the yields on 10 year Portuguese bonds are now over 9% and are expected to reach double digit interest in the coming days. Portugal's own banks are threatening to stop buying Portuguese bonds. What stands between Portugal and the inevitable bailout are the upcoming Portuguese elections.
It requires a government to ask for a bailout and agree to the repayment terms and economic policies that accompany it. The lame-duck Portuguese government does command the authority to make the decision, but it does not want to. Seeking a bailout is tantamount to forfeiting the upcoming elections. The Portuguese Socialists witnessed what happened in Ireland when Fianna Fail negotiated a bailout for the country: the party sustained an electoral meltdown which they want to avoid.
Unfortunately for Portuga,l bond repayment dates do not respect election calendars. By the end of June, when it is doubtful that Portugal will have a new government, it will be necessary to refinance €9 billion to service Portugal's debts. If Portugal cannot repay, it defaults.
Portugal came up with the unique idea of seeking a bridge loan from the European commission. The reply from Brussels was that no bridging loan existed in the union financial arsenal. It is literally bailout or bust. However, this repeats another Irish problem, wherein the successor government may balk at the agreed-upon terms.
In the meantime, the European Union is in a spat with the ratings agencies because of a proposal to hold them liable in case they made a faulty assessment prior to a downgrade. The ratings agencies have responded that if such a provision is passed, they will simply steer clear of rating problematic countries in the euro zone, with all that would result in terms of investor confidence.
Portuguese citizens are far from optimistic. Some have applied to emigrate to Portugal's former colony of Angola. Another fanciful proposal calls for Portugal to merge with Portuguese-speaking Brazil whose economy is surging. As a down payment for such a merger, Portugal has already adopted the Brazilian spellings for the two countries' common language.