UPDATE 3-Portugal downgraded, banks reported to shun bonds

* Millennium CEO says country needs loan

* Opposition floats idea of short-term loan, PM rejects

* Moody’s cuts rating, following Fitch, S&P moves

* Two big bond redemptions in coming months

(Recasts, updates with no comments, details)

By Elisabete Tavares and Axel Bugge

LISBON, April 5 (Reuters) – Portugal’s credit rating was
downgraded again on Tuesday and the country’s biggest banks
reportedly threatened to stop buying government debt, urging the
caretaker administration to seek a short-term loan during
pre-election limbo.

Business daily Jornal de Negocios reported that the heads of
the country’s biggest banks met with the governor of the Bank of
Portugal on Monday, telling him that the country should secure
short-term financing to soothe concerns until a June 5 general
election.

Moody’s cut Portugal’s sovereign debt by one notch, saying
it believed a new government would need to seek financing
support from the European Union as a matter of urgency.
[ID:nL3E7F50X6]

Standard & Poor’s and Fitch have already downgraded the
country since the minority Socialist government resigned last
month after parliament rejected an austerity package.

The events have raised pressure on Lisbon, which has
struggled for months to shake off expectations that it will have
to follow Greece and Ireland in seeking a bailout.

A spokesman at the central bank would not comment on the
Jornal story, which reported that Portuguese banks were no
longer in a position to buy government debt after purchasing
large quantities of bonds in the past year.

A spokesman from Millennium bcp would not comment on whether
the bank had decided not to buy further government debt. Nor
would a spokesman from Banco Espirito Santo (BES.LS: Quote, Profile, Research) comment.

But Carlos Santos Ferreira, head of Millennium bcp (BCP.LS: Quote, Profile, Research),
Portugal’s biggest private bank, said in a television interview
late on Monday that it was “indispensable that the country seeks
a short-term loan”, of at least 10 billion euros.

A short-term loan has been mooted by Portugal’s opposition
Social Democrats. The party’s leader, Pedro Passos Coelho,
suggested it in a Reuters interview last month. [ID:nLDE72P0BM]

Such a loan, from the International Monetary Fund or
European Union, could soothe concerns around two big bond
redemptions the country faces in April and June, which total
about 9 billion euros.

It would be separate to any eventual bailout, which
economists say is virtually inevitable.

The euro slipped from a five-month high versus the dollar,
knocked by the Moody’s downgrade [FRX/]. The cost of insuring
Portuguese debt against default rose and 10-year Portuguese bond
yields headed towards nine percent. [GVD/EUR]

Portuguese bond yields have shot higher since the
resignation of the government two years before its term ends and
yields are scaling new euro-era highs virtually on a daily
basis.

“The government’s current cost of funding is nearing a level
that is unsustainable, even in the short-term,” Moody’s said in
a statement.

The country held an extraordinary auction of one year bonds
on Friday, when it raised 1.6 billion euros. It will auction up
to one billion euros of 6- and 12-month Treasury bills on
Wednesday.

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Graphic: euro zone credit ratings http://r.reuters.com/pyh48r

For more on euro zone debt crisis [ID:nLDE68T0MG]

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“GAME OVER”

Jornal de Negocios ran a separate column on Tuesday titled
“Game over, we have lost, Mr Engineer,” referring to Prime
Minister Jose Socrates who has insisted the country needs no
outside help.

Socrates vowed on Monday to keep resisting a foreign
financial rescue for the debt-laden country, including the
short-term loan suggested by the opposition. [ID:nLDE73328L]

Asked if a loan from the IMF was possible if the country
faced immediate financing problems, Socrates told RTP
television: “I don’t know of any IMF financing line that would
not enforce a programme with conditions.

“All programmes that have been negotiated so far were very
severe in terms of measures demanded from a country,” he said.

A euro zone source told Reuters on Monday that finance
ministers will discuss on Friday Portugal’s options under an
interim government, including whether it is capable of
requesting EU financial aid. [ID:nLDE7331TJ]

Concerns over Portugal’s ability to finance itself have
spiralled as the caretaker Socialist government, which is in
place until elections on June 5, has said it does not have the
power to request a bailout.
(Writing by Axel Bugge; Editing by Mike Peacock)

UPDATE 3-Portugal downgraded, banks reported to shun bonds