CONTAGION:SPAIN AND Portugal made efforts to damp down mounting speculation they could soon be forced to follow Ireland into an European Union-International Monetary Fund rescue as their borrowing costs surged and the euro fell.
A succession of political leaders denied either country was on the verge of a bailout, but claims by Germany’s top central banker that the euro zone’s €750 billion bailout mechanism might have to increase weighed on markets.
Efforts this weekend to finalise Ireland’s €85 billion aid package are seen in some quarters as a ring-fencing exercise to prevent any further contagion from the Irish problem. However, moves to confront head-on a “cacophony” of negative commentary about Portugal and Spain points to increasing concern about waning market confidence in their debt.
Portugal is perceived to be in a weak place although its embattled government passed an austerity budget yesterday.
There is anxiety in official and diplomatic circles that any Portuguese rescue could pressurise Spain and that an intervention in that country could stretch the existing rescue fund to its limits.
The fear is that this would erode political support for a scheme which was originally set up as a preventive mechanism.
A further concern is that markets would turn their attention to heavily-indebted countries such as Italy and Belgium, potentially taking euro zone solidarity to breaking point.
Spanish prime minister Jose Luis Zapatero went on regional radio to insist there was “absolutely” no prospect of his country needing external help to manage its finances. “Those who are taking short positions against Spain are going to be mistaken,” he said as he denied any pressure from Brussels or Frankfurt to extract new savings from his budget. The European Commission has not asked Spain for anything, the European Central Bank has not asked Spain for anything, neither yesterday nor the day before,” Mr Zapatero added.
However, rising bond yields led finance minister Elena Salgado to say Spain would issue less debt than planned before the end of the year. “We have a commitment to investors, so we won’t suspend any of the planned auctions from now to the end of the year,” she said after a cabinet meeting. “As we have more than enough margin, we will probably slightly reduce the volumes at each of those issues.”
She said Spain’s financing needs were “covered” as budget returns have exceeded expectations.
Spain’s net financing needs next year are some €45 billion.
The “spread” between the interest on Spanish 10-year bonds and the price of comparable German debt rose to a euro lifetime record 2.64 percentage points yesterday. The 10-year bond yield rose to 5.284 per cent before declining to 5.17 per cent.
There was much the same confident tone from Lisbon, where a Financial Times Deutschland report that some euro countries wanted Portugal to seek aid to avert pressure on Spain was quickly denied.
The paper quoted an unidentified source in Germany’s finance ministry saying a Portuguese rescue would be “good for Spain, because the country is heavily exposed to Portugal”.
European Commission chief Jose Manuel Barroso, a former Portuguese prime minister, described the report as “absolutely false, completely false”. He said rescue aid for the country had neither been requested nor suggested.
Still, the yield on Portugal’s 10-year government bond reached 6.93 per cent yesterday, pushing the spread over its German equivalent to 4.26 percentage points
Portuguese finance minister Fernando Teixeira dos Santos told Jornal de Noticias that EU states could not impose a bailout on his country. “There are those who think that the best way to preserve the stability of the euro is to push and force the countries that at this moment have been more under the floodlight to that aid. But that is not the vision or the political option of the countries that are involved.”