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Portugal to raise 1bn euros as debt woes continue Portugal pays higher rate to raise 1bn euros
(about 1 hour later)
Portugal's bid to raise money in the financial markets on Wednesday could be de-railed by the country's banks, analysts have warned. Portugal has successfully raised about 1bn euros ($1.4bn; £873m) but is paying a much higher interest rate to lenders.
Lisbon must raise about 1bn euros (£873m) to help service its debts ahead of a re-financing due in the summer. The government was forced to tap the financial markets to raise money to re-pay loans falling due next week.
But some of the country's own banks say they may not buy government debt unless Lisbon applies for money from the eurozone's emergency bail-out fund. But Lisbon is paying yields of 5.1% and 5.9% to borrow money for six and 12 months, against 3% and 4% is was paying to borrow last month.
Analysts said paying such high rates are unsustainable for an economy that is seeing virtually no growth.
The BBC's business editor, Robert Peston, said the rate is more than Ireland was paying before it received bail-out funds and "implies Portugal will have to go for a rescue after its general election" in June.
The markets will also be watching closely to see which institutions subscribed to the bond auction.
There has been speculation that some of Portugal's own banks were refusing to take part unless Lisbon applied for a bridging loan from the eurozone's emergency bail-out fund.
The government insists it does not need a bail-out.The government insists it does not need a bail-out.
Analysts say Portugal's fund-raising on Wednesday may still succeed despite the banks' ultimatum.
But the success may come at a high price. Portugal's cost of borrowing rose to more than 10% for the first time since the launch of the euro.
The jump in yields was sparked by ratings agency Moody's downgrading Portuguese government debt by one notch, to Baa1 from A3.The jump in yields was sparked by ratings agency Moody's downgrading Portuguese government debt by one notch, to Baa1 from A3.
The rating is still investment grade - but only just.The rating is still investment grade - but only just.
It is the second downgrade by Moody's in less than a month and follows fellow agency Standard & Poor's cut last week.It is the second downgrade by Moody's in less than a month and follows fellow agency Standard & Poor's cut last week.
'Confidence crisis''Confidence crisis'
Lena Komileva, global head of G10 strategy at Brown Brothers Harriman, told the BBC that the financial situation in Portugal "has become critical". Lena Komileva, global head of G10 strategy at Brown Brothers Harriman, told the BBC before the auction details were released that the financial situation in Portugal "has become critical".
She said: "The government is not just facing a confidence crisis, it is facing a classic, text-book liquidity crisis in the markets.She said: "The government is not just facing a confidence crisis, it is facing a classic, text-book liquidity crisis in the markets.
"The Portuguese banks' attempts to force Lisbon towards seeking some sort of bridge loan [from the bail-out fund] increases the risk of a failed auction [on Wednesday]," she said."The Portuguese banks' attempts to force Lisbon towards seeking some sort of bridge loan [from the bail-out fund] increases the risk of a failed auction [on Wednesday]," she said.
Portugal has to repay more than 4.2bn euros in loans on 15 April, and then another 4.9bn euros in June.Portugal has to repay more than 4.2bn euros in loans on 15 April, and then another 4.9bn euros in June.
Moody's said Tuesday's downgrade was "driven primarily by increased political, budgetary and economic uncertainty".Moody's said Tuesday's downgrade was "driven primarily by increased political, budgetary and economic uncertainty".
Last week, the Portuguese government admitted it had missed its budget deficit target for 2010.Last week, the Portuguese government admitted it had missed its budget deficit target for 2010.
Moody's said the increased uncertainty in the country heightened the risks that "the government will be unable to achieve [its] ambitious deficit reduction targets" in the next three years.Moody's said the increased uncertainty in the country heightened the risks that "the government will be unable to achieve [its] ambitious deficit reduction targets" in the next three years.