Markets brush off Portuguese bailout concerns

The Associated Press
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.

Germany's DAX ended 1.9 percent higher at 6,933.58 while France's CAC-4o rose 1.4 percent to 3,969.84. The FTSE 100 index of leading British shares ended 1.5 percent higher at 5,880.87.

In the U.S., stocks were fairly buoyant too. The Dow Jones industrial average was up 0.7 percent at 12,168 around midday New York time while the broader Standard & Poor's index rose 0.8percent to 1,308.

U.S. stocks were supported by figures showing fewer people applied for unemployment benefits last week, with the average number of unemployment filings over the last four weeks dropping to its lowest level since July 2008.

Investors' appetite for riskier trades, such as stocks, has been weighed down in recent weeks by the confluence of alarming events around the world. On top of Japan's natural disasters, investors had to grapple with the potential implications of a nuclear meltdown and the escalating conflict in Libya.

Earlier in Asia, Hong Kong's Hang Seng rose 0.4 percent to 22,915.28, and South Korea's Kospi added 1.2 percent to 2,036.78.

However, mainland Chinese shares were slightly down amid concerns that the People's Bank of China would continue to tighten monetary policy in order to fight inflation. The Shanghai Composite Index lost 0.1 percent to 2,946.71 and the smaller Shenzhen Composite Index lost less than 1 point to 1,299.53.

The Nikkei 225 slipped 0.2 percent to close at 9,435.01, a day after Japan estimated the damage from the March 11 earthquake and tsunami at $309 billion. It now ranks as the most expensive natural disaster on record.

In the oil markets, benchmark crude for May delivery was down 21 cents at $105.96 a barrel in electronic trading on the New York Mercantile Exchange.

Oil has jumped 24 percent since Feb. 14 as violent protests rocked the Middle East and North Africa and traders worry about possible crude supply disruptions. In Libya, fighting between rebels and government forces has halted most of the country's 1.6 million barrels a day of crude production.


Pamela Sampson in Bangkok contributed to this report.

© 2011 The Associated Press