Europe debt market tensions worsen ahead of summit

The Associated Press
Wednesday, March 23, 2011; 5:41 PM

BRUSSELS -- Europe's debt market jitters flared up again Wednesday as investors worried about the near-term fates of Portugal and Ireland, an ill omen on the eve of a summit where EU leaders plan to complete their crisis-fighting plan.

Investors doubt the two countries, embroiled in financial crises that have created political shockwaves, will be able to cut their borrowing loads through austerity measures alone, meaning Europe's debt crisis will likely get worse before it gets better.

Portugal's prime minister quit late Wednesday after lawmakers failed to back his government's latest austerity package. The resignation puts Lisbon into political limbo just as it faces huge debt repayment deadlines and desperately needs markets' confidence to avoid a humiliating international bailout.

In Ireland, the results of stress tests next week will reveal the true extent of capital needs at the countries' struggling banks. Dublin wants more help to manage the bank losses, threatening to burn senior bondholders - who have so far been spared in Europe's debt crisis - if none is forthcoming.

At the same time, Prime Minister Enda Kenny's new government is not making many friends among its eurozone counterparts by continuing to refuse changes to its rock-bottom corporate tax rate even while demanding lower interest rates on its euro67.5 billion ($96 billion) bailout.

A German government and an EU official both said the chance of Ireland getting a better deal in its rescue loans at the summit was very low. Both officials declined to be named in line with department policy.

Against that backdrop, the mood in the bond markets was distinctly pessimistic.

The yield - or interest rate - on Portugal's ten-year bonds closed up 0.10 percentage point at 7.63 percent, just short of euro-era highs, while Ireland's yield ended 0.35 percentage point higher at 10.05 percent, after hitting a record earlier in the day.

More significantly, investors are asking for even more to lend in the short term. Analysts say that is due to concerns among private investors that they could be forced to take losses in case of bailouts under the eurozone's crisis regime for 2013 onwards.

Although EU officials have stressed that no debt issued before June 2013 would face a restructuring, markets are unnerved by the fact that the European Stability Mechanism, the new bailout fund, will get preferred creditor status. That means it will get repaid before any private creditors, making their investments more risky.

"Investors are now measurably more concerned about the short term outlook for Irish sovereign debt today than they were even during the height of the crisis in early November," said Simon Derrick, a senior analyst at The Bank of New York Mellon.

Though Portugal has not been bailed out yet, markets are acting like it's just a matter of time.

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