Debt Worries Shift To Portugal; Greece Borrowing Rates Back Near Highs

Concern over Portugal has now hit the front page as noted by the New York Times in Debt Worries Shift to Portugal, Spurred by Rising Bond Rates

Next target: Portugal.

Speculators have begun to zero in on another small member of Europe’s troubled monetary zone, highlighting the same economic flaw that brought Greece to the verge of insolvency: a chronically low savings rate that forces a reliance on the now-diminishing appetite of foreign investors to finance persistent deficits.

Just as investors are turning their attention to the next vulnerable country, Greece moved a step closer on Thursday to activating a $61 billion rescue package, as Prime Minister George A. Papandreou asked the European Union and the International Monetary Fund to meet in Athens next week.

The aid package agreed on last weekend — aimed at calming fears of a Greek default — has not yet had its desired effect. The yield on Greek 10-year bonds briefly topped 7.3 percent Thursday, not far from the 7.5 percent it was at before the rescue package was announced. Interest rates on 10-year government bonds for Portugal have also been rising, hitting a high of 4.5 percent on Thursday.

“Now there will be more fiscal profligacy in Europe, more political fractures and ultimately the possibility that some countries might want to leave the euro zone,” said Joachim Fels, an economist at Morgan Stanley. The euro zone is made up of the 16 countries that use the euro.

Gilles Moëc, an economist for Europe at Deutsche Bank, said, “It is going to be a long and painful process for Portugal, and there are questions about whether they can do it.” He added, “It’s a reminder that there is an issue here.”

EU Commission Warns Portugal

Please consider Brussels Warns Portugal on Budget Deficit.

The European Commission has warned Portugal it may need to take extra steps to cut its budget deficit this year, adding that the economic crisis has highlighted the need for a permanent fund inside the eurozone to help struggling states.

Speaking to journalists in Brussels on Wednesday (14 April), economy commissioner Olli Rehn said Portuguese government plans to reign in excessive spending and increase tax revenues were generally solid, but not without risk.

As a result, markets have continued to identify the southern European economy as one of the euro area's most vulnerable, leading the Fitch credit rating agency to downgrade Portugal's rating late March.

The same agency on Wednesday said Greece may be forced to call on a recently brokered EU/IMF rescue plan before the end of April. "It could well be a week or two. I don't think they could leave it much longer than that," Fitch rating's director Christopher Pryce told Bloomberg News.

Market Forcing EU's Hand

Months ago, the EU tried jawboning borrowing costs down for Greece saying it believed Greece's austerity program was enough. The market did not buy it.

Next came various ambiguous threats by the EU to support Greece. That did not work. Next came an agreement to agree to do something. That did not work either. Nor did Greece's bluff to go straight to the IMF. With each futile attempt, the market drove Greece's borrowing costs higher.

On April 9th EU Says It's Ready To Rescue Greece If Needed. That predictably failed because the EU still did not disclose what the rescue plan entailed.

On April 11, after months of futile jawboning, the EU at long last put together a genuine lending facility of $61 billion of below market rates to support Greece. I talked about that plan in Grecian Formula 16 Now On Sale

After months of denial about unwillingness to offer below market pricing on formula 16, the EU stepped up to the plate with a gigantic $61 billion subsidized offering.

Please consider Greece Wins EU45 Billion Aid Pledge to Blunt Crisis

“This is a huge amount,” said Stephen Jen, managing director at BlueGold Capital Management LLP in London and a former IMF economist. “This is more than a bazooka. They have gone nuclear on the issue of Greece. In the short run the market is short Greek assets so we’ll get a rally in those.”

That nuclear option ignited a rally in Greek bonds (and a US dollar selloff) that lasted about 3 days. So here were are, with the huge bottle of Grecian Formula 16 still sitting unopened and yields on Greek bonds back up near the highs.

In baseball terms, the Contagion Team is at bat. Portugal is in the batter's box and Spain is on deck. Greece is on second base in scoring position. The EU is on the mound lobbing softballs while the IMF is in the bullpen warming up. Germany plays for team EU but refused to dress for the game.

This game could get interesting.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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