Europe debt fears pile pres­sure on Spain, oth­ers

La­hore, Is­lam­abad, Karachi Wed­nes­day, De­cem­ber 01, 2010, Zul Haj 24, 1431

The Pak Banker - - Front Page -

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

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