Portugal banks threaten to shun debt, urge bailout

Portugal's main banks have threatened to stop buying government debt, urging the caretaker cabinet to seek a short-term loan to tide it over a pre-election limbo that prompted another credit rating downgrade on Tuesday. Financial sources told Reuters the heads of the country's leading banks met Bank of Portugal Governor Carlos Costa on Monday, telling him that the country urgently needs a bridge loan of up to 15 billion euros ($21 billion) to secure financing until a June 5 snap general election.
"The banks defend a bridge loan because they have practically no more margin of manoeuvre to buy Portuguese sovereign debt," one of the three sources said. "The banks are close to their limits of exposure to Portuguese debt, whose risk is deteriorating." A bond-buying strike by Portugal's major domestic buyers could shut it out of financing from the markets, pushing it to seek a bailout like Greece and Ireland.
Moody's cut Portugal's sovereign debt by one notch to Baa1, saying it believed the caretaker government may need to seek urgent financing support from the European Union, before a full-blown bailout is requested by a new government. The agency said it could cut Portugal's rating further before its next review in July if it saw that short-term support was not available from its eurozone partners.
Standard & Poor's and Fitch have already downgraded Portugal since the minority Socialist government resigned last month after parliament rejected its austerity package. Moody's rating is still two notches higher than S&P's and Fitch's. Moody's lead analyst for Portugal, Anthony Thomas, told Reuters the caretaker government did not cite any short-term loan as part of its contingency plans for financing. A European Commission spokesman said the eurozone's emergency lending facilities extend loans to countries that ask for help in an established procedure that involves strict conditionality. A source said no special "short-term loan" outside a negotiated financial aid programme was possible.
Spokesmen from largest listed banks Millennium bcp and Banco Espirito Santo declined to comment on the banks' meeting at the central bank. But Carlos Santos Ferreira, head of Millennium bcp, Portugal's biggest private bank, said in a television interview late on Monday that it was "indispensable that the country seeks a short-term loan", of at least 10 billion euros.