The European Commission has said Portugal will not be able to secure a bridging loan from its European partners without agreeing first to an international debt bail-out under strict conditions.
The warning came after Portuguese newspaper Jornal de Negocios reported that the country's biggest banks had decided to stop buying government bonds. The country has to raise fresh funds to pay back €9 billion of state debt by mid-June.
The newspaper said the 'over-exposed' banks decided during talks on Monday to press outgoing prime minister Jose Socrates' caretaker government to ask the EU for a 'bridging loan' of €15 billion ahead of elections on June 5.
But a spokesman for EU economic and monetary affairs commissioner Olli Rehn told the AFP news agency that such a plan would go 'above and beyond what was decided by euro zone member states and therefore is not on the table'.
Pressure mounted on Portugal after credit rating agency Moody's downgraded the country's ratings by a notch from A3 to Baa1 and warned that it expected Lisbon to have to seek outside help to resolve its debt problems. The downgrade was just the latest by credit rating agencies since the Portuguese parliament last month rejected the government's latest austerity package - forcing Socrates' resignation.
Markets increasingly believe that Portugal will be forced to seek outside help, like Greece and Ireland last year, and are demanding ever higher rates of return to provide fresh funds to cover its debt.
Today, the yield on Portugal's benchmark 10-year bonds rose to record highs above 9%, though they fell back slightly to just under 8.93% by this evening. These rates are seen as unsustainable to have to pay for long-term funding.
Rehn's spokesman stressed that aid under either the euro zone's European Financial Stability Fund or a smaller fund worth €60 billion run by the commission would each require strict programmes of 'economic adjustment' to be implemented in exchange for loans.
Socrates insisted again yesterday that seeking outside help was the very last option because it would involve even tougher austerity measures than his government had introduced.