Investor jitters persist as pressure piles on Portugal

 

MARKET TURMOIL:MARKETS BRUSHED off soothing words from European Central Bank (ECB) chief Jean-Claude Trichet as the euro dropped to a 10-week low and pressure piled on Portugal, Spain, Italy and Belgium.

Although EU leaders had hoped that the €85 billion EU-IMF deal to bail out Ireland three days ago would ring-fence contagion from the sovereign debt crisis, conditions worsened yesterday as the declining value of the single currency capped a 7 per cent loss against the dollar last month.

Anxiety that Portugal may suffer the fate of Ireland is spurring the volatility, even though the country’s minority socialist government and a succession of top officials have been denying for days that any rescue is in prospect.

Mr Trichet sought to ease tension yesterday, saying in the European Parliament that he knew nothing to suggest financial stability in the euro zone was threatened in any fundamental way. However, he acknowledged that present conditions are “very, very difficult”.

Despite Portugal’s enactment of a swingeing austerity budget last Friday, market fears over the county’s outlook have intensified because investors believe any EU-IMF intervention in Lisbon would undermine Spain’s capacity to weather the storm.

Both of the Iberian countries have been under pressure to stabilise their public finances, with EU economics commissioner Olli Rehn warning they should intensify already severe austerity measures if targets are not met.

Mr Trichet stepped up pressure on Portugal yesterday, calling for structural economic reforms to be advanced. “I fully share your view that structural reforms in Portugal, including in the labour market, could permit Portugal to surmount its problems much better,” he told an MEP.

In addition, the Portuguese central bank said the country’s financial institutions faced an “intolerable” risk unless the government manages to bring its public spending under control as it struggles to combat a debt crisis.

The central bank said any failure to consolidate public finances would put the Portuguese banking sector in jeopardy, especially if the sovereign debt crisis continued in Europe. “The risk will become intolerable if we do not see the implementation of measures that consolidate public finances in a credible and sustainable way,” it added.

Adding to investors’ concern about the euro zone is the sense that the existing €750 billion bailout scheme would be too small to withstand any Spanish rescue, a fear magnified by a call last week from Bundesbank chief Axel Weber for the fund to be increased. The European authorities have dismissed the suggestion they might have to enlarge the fund but their efforts to stem volatility have so far come to nought.

The premium investors demand to hold 10-year Spanish, Italian and Belgian bonds over comparable German debt spiked to their highest levels since single currency was established in 1999, and the cost of insuring against any default of Irish, Italian, Spanish and Portuguese debt surged to record highs.

The volatility shows that an attempt by EU finance ministers to boost market confidence by setting out the conditions under which private investors would contribute to future bailout costs has not worked.

European banking shares fell yesterday, as speculation that ratings agency Standard Poor’s might cut its outlook on France dragged down major French lenders BNP Paribas, Société Générale and Crédit Agricole. French budget minister François Baroin called for calm, saying there was “no reason for concern” in relation to any move by the ratings agency.

Italy also sought to restore confidence. “Italy’s public finances are sound; we are not among the countries at risk,” said Luigi Casero, Italy’s treasury undersecretary.