Portugal Bends: Did the ECB Push?

Last week Portugal sold 1 billion euro of 12 month bonds for a yield of 5.902% which was up from 4.331% only three weeks previously.  Former Portuguese President Mario Soares in a speech claimed that Germany and France are trying to own the European Union, the financial crisis was global and imported into Portugal, and Germany has benefited the most from the eurozone and will not be content until Germany it the Master.  Soares went so far as to say Germany has led us into two world wars and asked if it is leading Europe to another.

During the week the five year bond rose to 9.91%, which would indicate bailout level, while Portuguese politics remained polarized over any attempt to ask for EU/IMF aid.  Moody's cut Portugal's sovereign debt by a notch and the largest Portuguese banks told the central bank of Portugal that they would stop buying government bonds and urged the government to take a short-term interim loan until the June 5th election.  With the bank's ultimatum, many market commentators concluded it was already too late and the EU said there would be no interim loan without first agreeing to a international bailout with strict conditions.

By Wednesday the government sought financing assistance from the European Union.  Wednesday's short term debt auctions indicated Portugal had met its debt ceilings and many observers were still mystified at the refusal of the Portuguese banks to buy sovereign debt as it was not in their interest to not do so.  Portugal's banks did rally, as a result, in the stock market.  The rich countries of the Europe immediately pushed Portugal to make even deeper fiscal cuts and privatization during its national election if it hoped to receive any aid.

Subsequently, the Portuguese banks publicly said that the ECB had instructed them to cut their exposure to Portuguese sovereign debt if they wanted continued financing liquidity  from the ECB.  Trichet immediately denied the ECB had "forced" the Portuguese banks or government to do anything.  Trichet also publicly stated that the ECB, in fact, had encouraged the Portuguese.  This would not be unlike the pressure the ECB exerted on Ireland.

The ECB has chosen repeatedly to abandon the national needs of eurozone members and forsake a stronger union, while asserting austerity which is dooming each eurozone country one at a time to more debt, no growth, and no power. 

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