Europe debt fears pile pressure on Spain, others
Lahore, Islamabad, Karachi Wednesday, December 01, 2010, Zul Haj 24, 1431
MADRID: Investors sold off government bonds from Spain, Portugal and Italy on Tuesday amid worries that Europe's debt crisis has not been contained by Ireland's bailout but is putting pressure on other fiscally weak countries.
The yields on Spain's 10year bonds jumped as high as 5.7 percent by midmorning, making for a euro-era record difference of 305 basis points against the benchmark Germany 10-year bond, which had a yield of 2.7 percent.
The spread on Italy's 10year bond reached 210 points, also the highest since the launch of the euro, before easing back somewhat. Portugal, whose yields soared last week, saw its spread edge higher as well.
Spain and Portugal have continually denied they will need a bailout like Ireland and Greece but investors have become increasingly skeptical that the series of bailouts will stop with Ireland.
While rescuing Portugal would be about as costly as Greece or Ireland, who each represent less than 2 percent of the eurozone economy, a Spanish bailout would test the limits of Europe's finances. It accounts for over a tenth of the eurozone economy, and Italy is even larger.
"It is clear that the market is aware of the tight-rope that 'peripheral' governments are walking," said Neil Mellor, currency strategist at Bank of New York Mellon.
Portugal's central bank warned in a report Tuesday that the financial system is facing "serious challenges," as foreign concerns about public, private and corporate debt have made it harder for Portuguese banks to raise money on international markets. Continuing to request financing from the European Central Bank is "unsustainable," the report warned, saying banks should adopt a commercial policy of encouraging saving to ensure their liquidity.
Traders worry that instability in Portugal could easily cross the border into Spain.
Spanish Prime Minister Jose Luis Rodriguez Zapatero has vigorously defended the nation's economy and finances. He insisted over the weekend that his administration will forge ahead with austerity measures and force troubled banks and regional governments to reveal information about savings and restructuring efforts so as to restore confidence.
Zapatero claims the structural reforms under way, which include loosening hiring and firing restrictions in the job market, freezing pensions and liberalizing the energy sector, will eventually boost the country's competitiveness, among the worst in the eurozone. He maintains Spain's plans to reduce its deficit are being fulfilled scrupulously and added that the country's total debt was still 20 percentage points below the European average despite the crisis. -PB News