Pressure on Portugal heightens amid debt fears

By Pan Pylas

Associated Press

Published: Monday, Jan. 10 2011 8:46 a.m. MST

FILE-- In this Nov. 2, 2010, file photo, Portuguese Prime Minister Jose Socrates, left, and Portuguese Finance Minister Fernando Teixeira dos Santos gesture during the 2011 state budget debate at the Portuguese parliament in Lisbon. Europe's debt crisis looked increasingly likely to claim another victim on Monday Jan. 10, 2011, as Portugal's borrowing rates spiked to euro-era highs amid reports Germany and France are pushing it to accept outside help and prevent contagion to other countries.

Francisco Seco, File, Associated Press

LISBON, Portugal — Europe's debt crisis flared up once again Monday, as Portugal's borrowing rates briefly spiked to euro-era highs amid reports Germany and France are pushing it to accept outside help to avoid contagion to other countries.

The yield on Portuguese 10-year bonds — a key gauge of investor sentiment — touched a potentially unsustainable 7.18 percent at one stage Monday. It then fell back to 6.94 percent on speculation that the European Central Bank was intervening by buying bonds — yields drop as prices rise.

"I wouldn't be surprised if the ECB is trying to stabilize markets, but it's a band-aid approach," said Neil Mackinnon, global macro strategist at VTB Capital. "All it does is that it kicks the can down the road; it doesn't resolve the underlying issues."

Since the bailout of Greece in May, the ECB has taken a more active role in Europe's debt crisis by buying the bonds of the most imperiled eurozone countries. As of last week it had bought €74 billion ($96 billion) in government bonds. It doesn't have a target or limit but withdraws that same amount of money from the economy to avoid inflation risks.

Monday's early spike in yields followed a report in German newspaper Der Spiegel that France and Germany are both pressing Portugal to tap a European rescue fund to keep the crisis from spreading to much-bigger Spain.

"Germany is not pressuring anyone, and has not pressured anyone in the past," German government spokesman Christoph Steegmans said. The French government declined to comment.

Amadeu Altafaj Tardio, the spokesman for EU Monetary Affairs Commissioner Olli Rehn, also denied that European officials were preparing a bailout for Portugal.

"There is no discussion to this effect and none is envisaged at this stage," he said.

Analysts estimate that financial assistance for Portugal, which has been dogged by low growth and rising debt levels, would be between €50 billion and €100 billion ($65 billion to $130 billion).

Though Portugal insists it does not need a rescue, experts say the events distinctly echo what went on with Ireland just a couple of months ago.

Before Ireland was forced to accept a rescue from its partners in the EU and the International Monetary Fund, there were numerous reports suggesting that Germany, in particular, was pressuring Dublin to take the funds to contain the crisis. The Irish government also insisted it didn't need any help before eventually accepting a €67.5 billion ($87.5 billion) bailout.

"First we have the speculation that Portugal is being pressured into taking funds in order to save the crisis from spreading to Spain," said Derek Halpenny, an analyst at the Bank of Tokyo-Mitsubishi UFJ. "Then we get the denials from Portugal."

The prevailing view in the markets is that Europe may be able to support Portugal but that a bailout of Spain would test the limits of the existing bailout fund, potentially putting the euro project itself in jeopardy if governments don't put up more cash.

Spain accounts for around 10 percent of the eurozone economy, compared with Greece, Ireland and Portugal, which account for only about 2 percent each. The yield on Spanish 10-year bonds rose to 5.5 percent Monday, while benchmark German bonds were steady at 2.9 percent. Germany's economy is healthy compared with Portugal and Spain, but it could also suffer if it has to help shore up another ailing eurozone country.

Markets have brushed off the Portuguese government's repeated claims over the past year that it doesn't need financial help. The minority government has introduced an austerity program of tax hikes and pay cuts it says will restore fiscal health.

The key to whether Portugal gets a bailout sooner rather than later could come Wednesday, when the government aims to raise €1.25 billion ($1.62 billion) by auctioning off 3-year and 9-year bonds. Portugal needs to ask investors to lend it €20 billion ($26 billion) this year to finance public accounts.

If it doesn't get enough investor backing or there's a consequent impact on Thursday's debt offerings from Spain and Italy, then analysts reckon a bailout could be imminent. All eyes would then turn to next week's meeting of eurozone finance ministers in Brussels.

"Perhaps more interesting is the market's attitude to Spanish and Italian paper on Thursday; this will be a truer test of whether or not contagion is getting a grip," said Jane Foley, an analyst at Rabobank International.

Spanish Economy Minister Elena Salgado lent Portuguese authorities support Monday, saying Portugal won't need a bailout because it is enacting reforms that will help save the nation's economy from imploding.

"Portugal will not need any outside help," Salgado said in an interview with Spain's Cadena Ser radio. "I think Portugal will not have to resort to any plan because it is fulfilling its commitments."

She added that Portugal "has structural weaknesses, but will make the corresponding reforms."

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Pylas contributed from London. Alan Clendenning in Madrid and Gabriele Steinhauser in Brussels also contributed to this report.

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