Markets push Portugal towards bond pariah Greece

Mon Jan 30, 2012 6:07pm EST
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By William James and Axel Bugge

LONDON/LISBON (Reuters) - Portugal's slide towards becoming the next Greece - needing a second bailout to avoid bankruptcy - accelerated on Monday as untrusting underwriters hiked the cost of insuring Lisbon's bonds to new highs and insisted it be paid up front.

Business and consumer confidence also hit record lows, the latter battered by the lower salaries and across-the-board tax hikes that were part of Portugal's painful austerity program.

Banks and others offering default insurance to holders of Portuguese sovereign debt have begun demanding huge up-front payments rather than allowing costs to be spread over the term of the contract.

On Monday, this meant that it cost a whopping 3.95 million euros to insure 10 million euros in bonds over five years, payable now.

It made Portugal the second-highest sovereign to insure in the world, after Greece, and implied a huge lack of confidence in market circles about Lisbon's future.

While Italian and Spanish borrowing costs have fallen, Portuguese bonds have come under intense pressure from investors after Standard & Poor's downgraded 15 euro zone countries earlier in January, putting Portugal in the "junk" category.

Its already soaring 10-year bond yields surged on Monday by 171 basis points to 17.353 percent, suffering their third worst day in the euro era and adding to expectations that Lisbon will have to get a second bailout from the European Union and International Monetary Fund to go with the 78 billion euro package it has already been handed.

There is also increasing concern that Portugal will be forced to restructure its debt like Greece, even though its debt levels of around 105 percent of gross domestic product are much lower than Greek ones.   Continued...