Portugal moves toward resolving political impasse

Portuguese President Aníbal Cavaco Silva on Monday called a meeting of the Council of State for March 31, a constitutional requirement prior to dissolving parliament and calling elections.

The announcement came in the wake of Prime Minister José Sócrates decision to resign on March 23 after the latest batch of austerity measures aimed at bringing the country's budget deficit back within the ceiling set by the European Union was rejected by deputies.

Bloomberg quoted Cavaco Silva as saying the caretaker Socialist government and the main Social Democrat Party and the People's Party had pledged to continue with the process of fiscal consolidation.

"Portugal's three largest parties guaranteed to the president their unequivocal commitment to a strategy of budget consolidation and the targets of deficit reduction announced by the Portuguese state to guarantee the path of sustainability of public debt," Cavaco Silva said in a written response to questions emailed by Bloomberg.

The latest developments on the political front emerged as Portuguese government bond yields hit yet new record highs since the euro zone was set up in 1999.

The yield on the benchmark 10-year government bond moved to just shy of the 8-percent mark. Meanwhile, the yield on the five-year bond was moving ever closer toward the 9-percent level.

Sócrates warned over the weekend that any eventual bailout of his country "would worsen the financing conditions of other European countries." Sócrates' budget consolidation plan aimed to cut the budget deficit from around 7 percent last year to 4.6 percent this year before bringing it down to the European Union ceiling of 3 percent the following year.

Fitch and Standard & Poor's downgraded Portugal's ratings in the wake of Sócrates' resignation. S&P on Monday warned it may cut the sovereign debt rating further as early this week, and lowered the ratings of five Portuguese banks, citing an "increasingly difficult economic, financial, and operating environment" in Portugal.

"In our view, the wholesale markets will remain closed for [for Portuguese banks] the issuance of medium and long-term debt, and temporary strains in the short-term markets cannot be disregarded," S&P said.

The long-term ratings of Banco Santander Totta, Banco Espírito Santo, state-controlled Caixa Geral de Depositos, Banco BPI, Banco Commercial Português were all cut to BBB, but in the case of Totta from A instead of A- for the rest.

S&P said although it believes the fact that Totta's parent Santander gives it greater financial flexibility compared with its peers, it questioned whether the leading Spanish bank would have much incentive to provide financial support to Totta if Portugal "were to face meaningful stress."

The ratings agency conditioned the possibility of a further cut in the sovereign rating to the content of an official announcement about the European Stability Mechanism, the emergency fund for euro-zone countries with debt problems, which is due to replace the European Financial Stability Facility (EFSF) in 2012.