" Portugal's road to bailout " by Martín Feldman , Ivan Delgado Egea - FXstreet.com

Portugal finally gave in to months of market pressure and formally requested financial aid to Europe. The path the Iberian nation followed to the place where it's at was not without pain. In the process, the country's government collapsed, the debt rating was crushed by all three major agencies, Moody's, S&P and Fitch with the ensuing rise in borrowing costs and now will have to bear the austerity measures the funding package entails.

On The 5th, Moody's Investor Services downgraded Portugal's long-term bond rating for the second time in three many weeks, as did Fitch and S&P, this time one notch to Baa1 from A3, just two steps away from 'garbage bond' rating. The rating company's release cited as reasons for the downgrade the uncertainty surrounding the country's political leadership. It also signalled towards the possibility of debt restructuring and the revisions to the budget deficit and outstanding government debt estimates as sources of weakness.

The rating cut triggered yet another surge in yields: 5-year maturity bonds' yields soared past 10%, signalling a new high since the dawn of the eurozone in 1999. The benchmark 10-year bonds followed suit and headed to the upside driving yields to 8.76%, widely surpassing the threshold where both Greece and Ireland were forced to tap the European fund.

On the morning of the 6th, The Portuguese Treasury auctioned 455 million euros in 12-month and 550 million in 6-month bills today. Despite a good bid to cover ratio, 2.6 and 2.3 respectively, the risk premium demanded by investors drove yields higher, the one year maturity rose to 5.902% versus 4.331% in the previous placement and 5.117% on the 6-month bill which compares to the 2.984% managed in the last offering of this sort.

Portugal Finance Ministry stated "current yields showed irreparable damage from austerity package."

At 17.25 GMT that same day Bloomberg carried the following headline from Negocios: “Portugal says needs EU financing”. Right after the news, the EUR/USD barely showed a mediocre 10 pips, making it clear markets widely anticipated this.

Amongst the most relevant lines captured by the media on Portugal’s ex-PM Socrates official plea for a bailout were: “Fiscal situation was aggravated by austerity rejection. Market rates were a clear signal of difficulties accessing markets. Regrets decision became inevitable. Will try and get best possible terms in aid negotiations.

Olli Rehn, Economic and Monetary Affairs Commissioner, welcomed Portugal's announcement labelling the decision: "a responsible step toward stability in the Iberian country”.

On Thursday, Portugal's government submitted the official request for a bailout to the EU which prompted an immediate response from the Ecofin group gathered in Budapest. The European authorities started working out the financing needed and the conditions the aid package will have attached. The first draft places Portugal's financing needs around 80 billion euros, Rehn said.

The structure of the loan is likely to be the same as for Greece and Ireland, a third will be provided by the International Monetary Fund while the European Financial Stability Fund and the European Commission will pitch in the rest.

The funding coming from the EFSF carries the higher cost with a premium of between 2 and 3 per cent on top of the cost of the loan, on the other hand, both the European Commission and the IMF charge 2.925%. The conditions might become a source of discussion as discontent is rising both in Ireland and Greece regarding the terms of their bailouts. While Ireland is likely to seek a renegotiation of the loan's cost, European officials are rebuffing the possibility of restructuring Greece's debt.

In terms of the rest of the PIIGS, Europe wants to make sure Portugal is the last country to be forced into tapping the fund. Officials from every branch of the European government are trying to reassure markets that Spain will not be needing a bailout, praising the reforms it undertook and pointing to the strengths of the Spanish economy compared to the Portuguese.