Markets brush off Portuguese bailout concerns
Thursday, March 24, 2011; 1:04 PM
LONDON -- Markets on Thursday brushed aside mounting speculation that Portugal would soon be tapping a European bailout fund amid hopes that the continent's debt crisis may be about to claim its final scalp - for now.
Though Portuguese Prime Minister Jose Socrates resigned after lawmakers rejected his government's latest austerity package, the ripples in the markets were noticeably serene Thursday.
The yield on Portugal's ten-year bonds spiked to euro-era highs above 7.7 percent - an unsustainable level - as investors appeared to think it's inevitable that the cash-strapped country will have to get a financial rescue package, as Greece and Ireland already have.
Elsewhere though, markets were taking it all in stride. The euro remained well-supported above $1.40 - a long way above $1.18 trough it hit last summer when Europe's debt crisis seemed to threaten the very existence of Europe's single currency experiment.
By late afternoon London time, the euro was trading 0.7 percent higher at $1.4213.
Hopes that Europe's debt crisis may not spread elsewhere were also evident in the performance of Spanish government bonds - the yield on its ten-year bonds was down 0.4 of a percentage point at 5.16 percent. In the hierarchy of Europe's indebted, Spain is widely considered to be in the most perilous situation after Greece, Ireland and Portugal.
But analysts said optimistic spirit was directly related to hopes that Europe has finally gotten a handle on the magnitude of its debt crisis after a shaky start. Measures for better budgetary discipline across the eurozone as well as increasing the size and scope of the EU rescue fund are set to be approved over the coming two days in Brussels.
Jeremy Batstone-Carr, director of private client research at brokerage firm Charles Stanley, said the markets are hopeful that the leaders will agree to increase the size of the rescue fund "to survive the buffering from Greece, Ireland and Portugal" but warned that the EU has a history of disappointing markets.
The key to the future is whether a much bigger country, notably Spain, the eurozone's fourth largest economy, starts losing the faith of the investing community. At the moment, Spain's borrowing costs in the markets are high compared to when the debt crisis began over a year ago, but are manageable.
"Were Spain to show signs of fiscal deterioration, then that would put the euro on the slide," Batstone-Carr said.
For now though, it's a sharp contrast to last May and November when first Greece and then Ireland were bailed out. Then it was a case of investors identifying which country may be next to join the bailout club. Portugal looks increasingly doomed to join the others but investors do not appear to be looking for the next victim.
Stocks were also buoyant across Europe.