The German Finance Minister Wolfgang Schäuble said on Friday that Portugal "has to do everything in its power to counteract the uncertainties in the financial markets," referring to the rise in interest rates on Portugal’s bonds and the lack of international glee at its 2016 State Budget.
Schäuble said that European ministers are concerned at the increases in interest rates on Portuguese debt in the financial markets.
"That's what worries us, all the finance ministers have enough knowledge to know that this is an additional burden on the State Budget," noted Schäuble, adding that national authorities should "avoid any situation which provokes insecurity in the markets."
The Director of the European Financial Stability Mechanism, Klaus Regling, said he was "reassured" that Portugal has undertaken to prepare additional measures that may be necessary, as the markets have reacted negatively to the uncertainty of the 2016 Budget.
The Eurogroup in fact endorsed the European Commission which gave the green light to Portugal's 2016 State Budget after Lisbon introduced additional measures of around €1 billion to help balance its projections.
Brussels did append the 'risk of default' and the Eurogroup has asked Portugal to work on additional measures to ensure that the country complies with the European commitments. This is not a second bailout, but a line of credit to be put in place in case Portugal’s projections vary too far from its budget.
The President of the Spanish Government, Mariano Rajoy, said today he was "concerned" about the rise of the Portuguese debt interest, implying that this is due to government policies and left wing encouragement.
"I note with concern the rise in debt interest in our neighboring country. We must maintain fiscal stability and adapt ourselves to the world in which we live" Rajoy said about the situation in Portugal, forgetting for a moment the economic conditions in his own country.
Today’s Telegraph asked whether a sovereign debt crisis is coming back to haunt Europe, claiming that it is only the European Central Bank which is holding Europe together, “If the ECB was to step back you would have a massive sovereign debt crisis."
The ECB is buying €60 billion of EU countries’ debt each month which has kept a lid on borrowing costs in the most vulnerable member states, but some of these are creeping up with the riskier countries looking at sharp rises.
Portugal has witnessed yields on its 10-year debt rise to their highest level since 2014 at over 4% compared to Italy’s 1.699%.
These bond market indicators reflect concern that Portugal’s debt is not in good shape, in fact Portugal is the most indebted nation in Europe and hence vulnerable to market worries that in April Portuguese government debt may be downgraded to ‘junk’ status the last remaining credit rating agency that still list Portugal's debt as 'investment status.'
In the event of a full house of ‘junk’ ratings, Portuguese debt would no longer be eligible for ECB bond purchasing aid with observers already warning that Portugal needs to sign up to a new bail-out programme, even if it’s in the form of a precautionary credit line.
A 'junk' rating from all the international ratings agencies might well see the end of António Costa’s fragile Socialist administration and a new election called to ask exhausted voters yet again to make a choice.
The positive ratings agency, DBRS, said today it was "comfortable" with Portugal's ‘investment grade’ rating but is concerned about worsening interest rates.
"Right now, we are comfortable that our outlook of 'stable' for Portugal is appropriate," said Fergus McCormick of DBRS in a statement released by Reuters.
Currently the agency classifies Portugal’s short-term debt at BBB (low) with the outlook as 'stable' but "if market volatility continues, then our attention will turn to the political situation and what can be done in terms of fiscal adjustment," added McCormick.
The agency has scheduled a decision on Portugal’s rating for 29 April.
