Europe's government debt crisis has flared up again in the run-up to two crucial meetings of EU leaders as Portugal had to pay 50 percent more to raise cash in the markets on Wednesday than it had to just six months ago.
Investor tensions grew after the Portuguese government revealed it is paying 5.99 percent interest to raise 1 billion euros ($1.4 billion) in two-year bonds. That was way above the 4 percent demanded at the last similar auction in September and around four and a half percentage points more than the rate Germany has to offer — even though the two countries share the same currency.
The yield on Portugal's 10-year bonds rose a further 0.06 percentage point to 7.68 percent, a euro-era record and above the rates Greece and Ireland saw before accepting bailouts from the EU and International Monetary Fund last year.
The major concern in the markets is that the March 24-25 summit of EU leaders in Brussels will not yield the "comprehensive solution" to the debt crisis that has been trumpeted. There's also a realization that higher borrowing costs will make it far more difficult for countries like Greece and Portugal to grow themselves out of the debt mire they find themselves in.
Portugal's minority Socialist government has repeatedly spurned talk of a bailout. Prime Minister Jose Socrates said earlier this week that asking the IMF for help would "bring a loss of prestige, as well as losing the dignity of being able to present ourselves to the world as a country that can solve its own problems."
Portugal needs to raise 20 billion euros this year, and the Finance Ministry says it has already collected about 30 percent of that amount. It also argues that the implicit interest rate on Portugal's total debt stock is 3.6 percent, not far from the eurozone average of 3.5 percent.
European Commission President Jose Manuel Barroso, a former Portuguese prime minister, appeared to support Lisbon's strategy of resisting pressure for a bailout.
"Resorting to the bailout fund carries costs, not just reputational costs. If a country can avoid it, it should," Barroso said at the European Parliament on Tuesday.
The yield on Portuguese 10-year bonds has held above 7 percent for 25 straight trading days, however, and many analysts believe it is only a matter of time before Portugal cuts its losses and settles for some kind of help amid predictions it is headed for a double-dip recession this year.
Lisbon is pushing for changes to Europe's bailout fund that would allow it to buy countries' bonds on the open market and even loan money to member states through credit lines and more favorable interest rates.
Portugal's protracted financial agony — and the consequences it could bring for the wider eurozone — is the main focus of concern ahead of the March 25 meeting.
Earlier this year investors appeared to believe that the eurozone would agree on a revamped bailout mechanism, set new rules on budget deficits and a system of support funds to flow from richer countries in the single currency bloc to the poorest.
However, the mood has soured since then. There are signs that Greece and Ireland are going to find it difficult to renegotiate their rescue deals. The two countries are hoping that the interest rates on their respective loans will be lowered and that they will both have a longer time to pay them back.
Investors will be keeping a close watch on a meeting of eurozone leaders this Friday to see if any progress is being made ahead of the summit in late March. Any disunity or procrastination is unlikely to be received warmly in the markets.
The growing expectation that the EU deal will disappoint is reflected in the difference between the cost of German and Portuguese ten-year bonds, which has widened in past weeks.
"The recent re-widening also reflects an easing in the market's initial optimism surrounding the unveiling of the much anticipated comprehensive package from the European authorities in the month ahead," said Lee Hardman, a currency economist at The Bank of Tokyo-Mitsubishi UFJ.
Meanwhile, Greece suffered what it termed a "completely unjustified" ratings cut from Moody's Investor Services, prompting a further spike up in its borrowing costs to new euro-era highs.
The euro has been weighed down by the weakening market sentiment. On Monday it jumped above $1.40 for the first time since November in the wake of the European Central Bank's signal that eurozone interest rates will likely to rise next month. It has fallen since then, however, and by late morning London time on Wednesday was flat at $1.39.
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