UPDATE 5-Portugal banks threaten to shun debt, urge bailout

* Banks tell central bank country needs urgent loan

* Bond-buying strike by banks could be final straw

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

* Two big bond redemptions due in April, June

* T-bill auction on Wednesday, up to 1 bln euros on offer

(Changes sourcing on banks, adds statement on budget goal)

By Sergio Goncalves

LISBON, April 5 (Reuters) – Portugal’s main banks have
threatened to stop buying government debt, urging the caretaker
cabinet to seek a short-term loan to tide it over a pre-election
limbo that prompted another credit rating downgrade on Tuesday.

Financial sources told Reuters the heads of the country’s
leading banks met Bank of Portugal Governor Carlos Costa on
Monday, telling him that the country urgently needs a bridge
loan of up to 15 billion euros ($21 billion) to secure financing
until a June 5 snap general election.

“The banks defend a bridge loan because they have
practically no more margin of manoeuvre to buy Portuguese
sovereign debt,” one of the three sources said. “The banks are
close to their limits of exposure to Portuguese debt, whose risk
is deteriorating.”

A bond-buying strike by Portugal’s major domestic buyers
could shut it out of financing from the markets, pushing it to
seek a bailout like Greece and Ireland.

Moody’s cut Portugal’s sovereign debt by one notch to Baa1,
saying it believed the caretaker government may need to seek
urgent financing support from the European Union, before a
full-blown bailout is requested by a new government.

The agency said it could cut Portugal’s rating further
before its next review in July if it saw that short-term support
was not available from its euro zone partners.

Standard & Poor’s and Fitch have already downgraded Portugal
since the minority Socialist government resigned last month
after parliament rejected its austerity package. Moody’s rating
is still two notches higher than S&P’s and Fitch’s.

Moody’s lead analyst for Portugal, Anthony Thomas, told
Reuters the caretaker government did not cite any short-term
loan as part of its contingency plans for financing.

“The government has not mentioned anything like that to us,”
he said, adding that any short-term loan could come from
European institutions rather than the International Monetary
Fund as local media have suggested.

A European Commission spokesman said the euro zone’s
emergency lending facilities extend loans to countries that ask
for help in an established procedure that involves strict
conditionality. A source said no special “short-term loan”
outside a negotiated financial aid programme was possible.

Spokesmen from largest listed banks Millennium bcp and Banco
Espirito Santo (BES.LS: Quote, Profile, Research) declined to comment on the banks’
meeting at the central bank.
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.

Andre Rodrigues, a banking analyst at Caixa Investment
Banking, said banks were pressured by the depreciation of the
sovereign debt on their books, their own liquidity problems and
forthcoming European financial stress tests.

“For banks, it’s not a theoretical issue but a practical
one,” said Rodrigues. “It’s an additional pressure factor to
push Portugal into seeking a bailout or an interim loan.”

OPPOSITION WOULD BACK SHORT-TERM LOAN

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 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.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic: euro zone credit ratings http://r.reuters.com/pyh48r For more on euro zone debt crisis [ID:nLDE68T0MG] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The euro slipped from a five-month high versus the dollar
early on Tuesday, knocked by the Moody’s downgrade, but later
recovered on expectations of euro zone interest rate rises
[FRX/]. The cost of insuring Portuguese debt against default
rose and the 10-year Portuguese bond yield jumped above 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 on a daily basis.

The country held an extraordinary auction of one-year bonds
last week, raising over 1.6 billion euros. It will offer up to
one billion euros of 6- and 12-month Treasury bills on
Wednesday, which analysts still expect to be placed.

Socrates, whose government retains a caretaker role until
the elections, vowed on Monday to keep resisting any foreign
financial rescue, including the short-term loan suggested by the
opposition. [ID:nLDE73328L]

The government said on Tuesday it was firmly on track to
meet this year’s budget deficit goal of 4.6 percent of gross
domestic product after cutting spending by an estimated 3.6
percent in the first quarter.

The finance ministry also said it was implementing
cost-cutting measures that do not require parliamentary approval
but were part of the government’s austerity plan rejected by
parliament last month.

A euro zone source told Reuters on Monday that finance
ministers will discuss on Friday Portugal’s options under the
caretaker government, including whether it is capable of
requesting EU financial aid. [ID:nLDE7331TJ]
(Additional reporting by Shrikesh Laxmidas, Elisabete Tavares,
Andrei Khalip, writing by Axel Bugge, editing by Mike
Peacock/Ruth Pitchford)

UPDATE 5-Portugal banks threaten to shun debt, urge bailout