The main screen at the Stock Exchange in Madrid yesterday. Spain’s borrowing costs have soared amid fears the country could be affected by Ireland’s debt crisis. Spain’s benchmark stock index sank 3.1 percent yesterday, while Portugal’s fell 2.2 percent.
(Paul White/ Associated Press)
Nervous investors focus on Spain, Portugal
Iberian peninsula seen as eurozone’s next crisis spot
The main screen at the Stock Exchange in Madrid yesterday. Spain’s borrowing costs have soared amid fears the country could be affected by Ireland’s debt crisis. Spain’s benchmark stock index sank 3.1 percent yesterday, while Portugal’s fell 2.2 percent.
(Paul White/ Associated Press)
LISBON — Europe’s efforts to contain its debt crisis came under increasing strain yesterday as bond market jitters shook Portugal and Spain, seen as the 16-nation eurozone’s next-weakest links, now that Ireland has followed Greece by accepting a massive international rescue.
The nations’ borrowing costs rose, suggesting investors are more worried about default, while Spain limited the size of a bond sale because traders demanded higher premiums.
Stock traders panicked and dumped shares across all sectors, sending Portugal’s benchmark stock index down 2.2 percent by the close, while Spain’s sank 3.1 percent to a level not seen since July. The euro slid below $1.34 for the first time in two months.
Spooked by the scale of Greece’s bailout requirements in May and Ireland’s banking failures, international investors are looking much closer at the public finances of eurozone countries and they don’t like what they’re seeing, particularly in Portugal.
Traders are “looking for their next target’’ and Portugal fits the bill, said Emilie Gay, an analyst at Capital Economics in London. She predicts Portugal will have to ask for help by early next year, when it has to begin refinancing billions of euros in government bonds.
European Union President Herman Van Rompuy insisted Portugal’s finances are sound because the country’s banks are well capitalized, they haven’t had to cope with a severe housing market bubble, and the government has a strong program to bring the deficit down.
Portugal accounts for less than 2 percent of the eurozone’s total economy but a potential bail-out would crank up pressure on Spain, the European Union’s fourth-largest economy, and entail possibly dramatic repercussions for the entire bloc.
Analysts at Capital Economics described the risk of a Spanish bailout as “fairly low’’ but warned that “the cost would be devastatingly high.’’
“This threat is therefore closely linked to the risk of some form of eurozone breakup, stemming either from Spain being forced to leave and default or perhaps even from Germany jumping ship,’’ the analysts said in a report to investors yesterday.
Ireland’s decision to accept a loan to prop up its banks, which may reach $136 billion, and make sharp budget cuts has come just six months after the EU and IMF provided a similar sum for Greece.
Greece, meanwhile, is still grappling with its promised reforms and must make an extra effort to meet next year’s deficit targets, its international donors said yesterday.
Portugal’s recent public finance figures have sharpened concerns’ about its ability to handle its debt load. Public spending rose 2.8 percent in the first 10 months of the year, compared with a year earlier. Crucially, higher interest payments on its loans outweighed an increase in tax revenue, suggesting the weight of existing debt may be unsustainable as it offsets any progress in public finances.
The interest rate on 10-year Portuguese bonds rose to 6.9 percent yesterday from 6.8 percent the previous day. That was close to the record 7 percent breached earlier this month.
Since Greece’s bailout, Portugal has been considered a risk because of its meager economic growth and high debt. It has borrowed huge amounts to finance welfare entitlements and private spending — while protecting jobs through labor laws that make it difficult to hire and fire workers.
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