Europe got a measure of relief from its debt crisis Thursday after Spain and Italy successfully tapped investors for more money and amid reports that Germany is ready to back proposals to increase the powers and size of Europe's bailout fund.
Still, European leaders face a struggle to come up with longer-term fixes amid fears that Portugal may soon be forced to seek a bailout to avoid collapse.
The positive bond auctions come a day after Portugal — most people's favorite candidate to join Greece and Ireland in the bailout club — easily borrowed 1.25 billion euros ($1.65 billion), which helped set the tone for Thursday's offerings from Spain and Italy.
Spain raised 3 billion euros via an auction of five-year bonds and investor demand, as with Portugal, was more than double what was being offered. And though the interest rate the Spanish government had to pay rose, it was not astronomical. The yield spiked to 4.542 percent from 3.576 percent the last time the bond with a 2014 maturing was offered, in line with developments in the bond markets following the stresses caused by the 67.5 billion euro bailout of Ireland.
A similar picture picture emerged in Italy, which is considered less vulnerable in Europe's debt crisis than Spain.
The Italian government sold 6 billion euros ($7.78 billion) in medium- and long-term bonds, with room to spare. Again, though the yields on the two offerings spiked up higher than the last time, they weren't anything to get too worried about.
Given this underlying relief — after all, only a few days ago, there was speculation that there could be a major disappointment lurking somewhere in this week's auctions — the euro has shot up to one-week highs above $1.31 as the bond market pressure on countries like Portugal and Spain eased further.
The yield on Portugal's 10-year bonds fell for the fourth straight day, to 6.664 percent, while Spain's dropped to 5.37 percent.
"As of today, the markets have breathed a sigh of relief but underlying issues remain unresolved in the absence of a more coherent policy to deal with potential debt restructuring," said Neil MacKinnon, global macro strategist at VTB Capital.
MacKinnon said the success of this week's auctions have a lot to do with a more active role taken by the European Central Bank in buying the bonds of weaker governments in recent days but that only "kicks the can down the road."
European finance minister will tackle longer-term solutions at a meeting in Brussels next week. Options include increasing the size of its bailout fund and charging countries that use it less interest.
Though many analysts believe Portugal will end up having to get a lifeline, as Greece and Ireland have had to, the real concern is stopping the crisis spreading to Spain. Emergency support for Spain would test the limits of the existing bailout fund, potentially putting the euro project in jeopardy if governments don't put up more cash. The country makes up over 10 percent of the eurozone economy, whereas Greece, Ireland and Portugal only account for around 2 percent each.
This fear of the debt contagion spreading to Spain that's reportedly the main reason behind growing speculation that eurozone finance ministers are preparing initiatives to boost Europe's bailout fund — the so-called European Financial Stability Facility — as well as making it more proactive in dealing with the crisis.
Citing unnamed sources, the Financial Times said Thursday that Germany is backing proposals to increase the capacity of the current fund from 440 billion euros as part of a package of measures designed to increase coordination among the euro's 17 countries, and that an agreement could be agreed at the next EU's leaders' summit in February.
"News that Germany is backing proposals to increase the powers and size of the eurozone rescue fund is another shot in the arm for the eurozone suggesting that politicians may be taken a more proactive and less reactive position with respect to the crisis," said Rabobank International analyst Jane Foley.
The ECB has reportedly been buying the bonds of the most indebted euro countries in the markets, which helps to raise their prices, taking pressure off the banks that hold them. It also lowers their yield, which represents the rate countries would pay if they went back to bond investors for more borrowing.
The fear is that rising rates can make additional borrowing too expensive, leaving an indebted government unable to pay off debt that's coming due. In that case, the options are default or a bailout.
ECB President Jean-Claude Trichet will likely be quizzed about the bank's bond-buying program when he holds a press conference following the monthly policy meeting, where the main interest rate is expected to be held at the record low of 1 percent.
Analysts also reckon the pledges of support from Japan and China have provided temporary relief in Portugal's battle in particular to prevent a bailout, but that underlying problems remain to be resolved both at the country level and at the EU level.
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