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« Are ETFs Really Safe? | Main | High River Gold Limited 06 April 2011 »

Portugal Request a Bailout

Portugal cracked flag 07 April 2011.JPG

Ireland, Greece and now Portugal, who's next – Spain! The PIGS are coming to the borrowing bowl one by one as members of the European Union slide down the slippery pole of horrendous debt.

LISBON — Portugal’s caretaker government gave in to market pressures on Wednesday and joined Greece and Ireland in seeking an emergency bailout. The decision came after the government was forced to pay much higher rates to sell more debt.

José Sócrates, Portugal’s prime minister, said in a televised address Wednesday night that he had requested aid from the European Commission after recognizing that borrowing costs had become unsustainable.

“I had always considered outside aid as a last recourse scenario,” he said. “I say today to the Portuguese that it is in our national interest to take this step.”

He did not, however, specify the timing of any bailout.

Portugal will probably need about 75 billion euros ($106.5 billion) in assistance, according to a recent estimate by Jean-Claude Juncker, the prime minister of Luxembourg, who presides over meetings of euro zone ministers. Some analysts have suggested that the amount could be as much as 100 billion euros.

A Portuguese bailout has long been expected, but the speed with which things moved Wednesday appeared to have taken European officials in Brussels by surprise, leaving the timetable unclear. European leaders have been working to keep the financial contagion from spreading. Lisbon’s move now puts pressure on Spain, which has undertaken major economic reforms, budget cuts and a banking clean-up to stay out of danger.

In a statement the president of the European Commission, José Manuel Barroso, said Portugal’s request “will be processed in the swiftest possible manner, according to the rules applicable.”

If the pattern of previous bailouts is repeated, a team of officials will be sent to Lisbon to discuss the conditions of a bailout, which will then need to be agreed upon by European finance ministers. That, however, will probably not happen for several weeks.

Caught in a political crisis and facing tough refinancing hurdles, Portugal has also been hit by repeated downgrades by credit-rating agencies, sending yields this week on Portuguese government debt to their highest levels since the introduction of the euro.

Mr. Sócrates, who had been governing without a parliamentary majority, resigned last month after lawmakers rejected his latest austerity package. To break the political deadlock, Portugal is set to hold a general election on June 5.

In a separate televised address, Pedro Passos Coelho, the leader of the main Social Democratic opposition party, said that he backed the decision to seek outside help.
Adding to the pressure on the government, Portuguese banking executives warned this week that they did not want to take on more sovereign debt, urging the government to negotiate a bridge loan with its European partners.

Alongside that of Portuguese banks and companies, “the rating of the country has fallen like never before,” Mr. Sócrates said. “This is a particularly serious situation for our country.”
European ministers agreed last May to provide 80 billion euros in loans to Greece over three years as part of a package in which the International Monetary Fund provided an additional 30 billion euros. In November, they also agreed to a rescue package worth up to 85 billion euros for the Irish government.

Last month, leaders of the euro zone countries agreed to cut the interest rate charged Greece to help ease its debt burden. No such agreement was made with Ireland because of Dublin’s refusal to accede to French and German requests to raise its low corporate tax rate of 12.5 percent.

For Portugal, the emergency financing will ensure that it can meet its 20 billion euros of borrowing requirements for the year. But it is likely to set off debate over what conditions will be tied to any rescue package, at a time when Portugal struggles with record unemployment and an economy that is likely to contract 1.3 percent this year, according to a recent forecast from the Bank of Portugal.

Further, the government’s recent effort to push through an austerity package combining more spending cuts and tax increases prompted Portuguese residents to take to the streets last month in a sign of rising social unrest.

“Outside intervention will be positive for our treasury but could be a disaster for our economy,” said Diogo Ortigão Ramos, a specialist on fiscal legislation at a law firm, Cuatrecasas, Gonçalves Pereira. “Whoever forms the next government, our creditors will have the final word.”
Mr. Sócrates said that the decision to seek help was taken amid expectations that market conditions would continue to worsen for Portugal.

Analysts suggested that markets would respond cautiously on Thursday given the uncertainty surrounding the terms of any bailout.

“I expect that the news will bring only limited relief” to the yield spread between Portuguese bonds and those of Germany, the reference securities in the euro zone, said Tullia Bucco, economist at UniCredit, adding that “it will not refrain the European Central Bank from delivering a 25 basis point interest rate hike” this week.

Earlier on Wednesday, Portugal sold Treasury bills at a much higher cost than last month. It sold 455 million euros (about $646 million) in one-year Treasury bills at an average yield of 5.9 percent, compared with 4.33 percent yield when Portugal last sold such bills on March 16.

The national debt agency also sold 550 million euros of six-month bills at an average yield of 5.12 percent, compared with a yield of 2.98 percent at a previous auction on March 2.

The Treasury bill sale came after Moody’s on Tuesday cut the sovereign rating of Portugal for the second time in a month. On Wednesday, Moody’s also downgraded by one or more notches the senior debt and deposit ratings of seven Portuguese banks.

New York Times 07 April 2011.JPG

Sooner or later the PIGS will leave or be ejected from the European Union for their own good and the good of the remaining members. However, we are still of the opinion that the European Union will disintegrate completely before long.


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SK Chart with profits re-invested 29 March 2011.JPG

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Reader Comments (3)

Well, this is excellent news for the buck, which I am long actually.
You guys keep partying, but the coming rise of the dollar is going to kill precious metals. Once the dollar breaks above 92.50 , it is going to stay there for years, killing all profits gold did last decade.

April 7, 2011 | Unregistered CommenterDi

Di - your grasp of economic reality is that of an eel-fisherman wearing Teflon gloves......:)

April 7, 2011 | Unregistered Commenterreal

First of all, this is hardly even news. It's the most telegraphed bailout in history.

Secondly, do you SEE the dollar rallying? In a word... no. It's collapsing.

Thirdly, don't assume the dollar and gold can't rally together. Periodic European crises will almost certainly result in flow INTO the metals. We've already seen that happen. Look at the big picture. Paper money has already given us the goodbye look. All that's left is to play out the drama.

Fourthly, you haven't been right about anything so far. Could you be wrong about this?

Lastly, I'm not "partying." I'm using precious metals as a hedge against financial and monetary chaos. Do you have any money insurance? If not, you're not paying attention. I am calmly watching my silver holdings rocket upward in terms of clownbucks and wishing the price would take a mighty I can convert more peachbacks to real money at a better rate.

Please, do me a favor and let me know when you throw in the towel. I'd like to use you as a contrary indicator.

Enjoy your parallel universe.

April 8, 2011 | Unregistered Commenterfallingman

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