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Portugal in Talks Over EU Aid

Portugal is holding talks with the European Union on how to meet its immediate borrowing needs as its banks press Lisbon to seek a bridging loan until a new government can negotiate a bail-out deal.

European Central Bank
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European Central Bank

Portuguese banks have been the biggest purchasers of the government’s bonds in recent months, but bankers said some lenders were now reluctant to buy more sovereign debt.

The country’s long-term credit rating was downgraded by Moody’s by one notch to Baa1 on Tuesday.

“It’s a question of levels of exposure, not a judgment on the risk of Portugal,” said Fernando Ulrich, chief executive of Banco BPI.

“Banks that are more exposed to government debt do not want to increase their exposure.” Portuguese bankers are also pressing policymakers to ask for an interim loan from other EU countries until a new government can negotiate a rescue packagewith the European financial stability facility.

“It is absolutely vital that Portugal asks the European Commission now for temporary support,” said Carlos Santos Ferreira, chief executive of Millennium BCP.

Senior bankers are said to have met central bank officials on Monday night to press their case for a bridging loan and to warn of their limited capacity to buy more government debt.

Yields on Portuguese government bonds rose to new euro-highs on Tuesday as the belief grew that the country would have to follow Greece and Ireland in seeking an EU-led rescue.

An auction of up to 2 billion euros ($2.8 billion) in short-term government debt today is seen as a crucial test of market sentiment after José Sócrates resigned as prime minister, on March 23, paving the way for a June 5 election.

A European official said talks with Lisbon were focusing on June, when Portugal has to pay 7 billion euros in bond redemptions and interest payments.

Under euro zone bail-out fund rules, the EU cannot provide a short-term bridging loan to any member. But the official said talks with Lisbon had focused on finding ways to ensure Portugal had adequate financing to meet the June repayments.

The EU has insisted on new austerity measures. Moody’s said it was confident other euro zone countries would support Portugal if it needed emergency financing before any full rescue package.

But the credit rating agency said it expected the next government to seek a financial rescue as a matter of urgency.

According to Moody’s, it was “very unlikely” that long-term debt markets would reopen to the Lisbon government or Portuguese banks until a new government was able to dispel doubts about the country’s commitment to fiscal tightening.