Portugal Sells, Spain Next
The euro zone is resting a little easier today after investors reacted favorably to Portugal’s first debt sale of the year. The sale bred some life into the troubled economy but did little to help the euro which was struggling to remain above the four-month low of $1.2860.
While France and Germany were quick to hail Portugal’s austerity cuts, many market analysts were unconvinced. The country’s austerity program is at the heart of the Presidential elections. Incumbent Socialist Portuguese Prime Minister, Jose Socrates is in a tight race to uphold his office in the January 23 elections.
His determination to implement severe fiscal cuts rather than pursue borrowing from the EU is not popular with the majority party’s candidate for Prime Minister.
Portugal’s Finance Minister, Fernando Teixeira dos Santos reported that 80 percent of the investors were overseas buyers. The country’s 10-year bond borrowing costs fell to 6.716, down from 6.806 at the last auction in 2010.
Wary analysts did not hesitate to caution optimism, reminding investors that Portugal has large amounts of debt to sell in April. It is believed that Portugal will be forced to approach the European Union for a bailout.
Spain’s Crunch Time Approaching
All eyes are clearly focused on Spain’s first bond sale of the year on Thursday. CNBC reported that while Portugal is troublesome, the EU does not have the ability to bailout Spain. If Spain is unsuccessful with its auction, the result could spell doom for the euro.
To make matters worse, Belgium announced a series of austerity cuts and vowed to trim its deficit from 4.7 percent to 4.0 by year’s end. Belgium is in a state on political unrest and has failed to form a new government since the elections last June.
As the third largest economy in the euro zone, the emergency stability fund does not have the resources to help Spain. It is doubtful that the Germany’s legislature would approve any further advances of taxpayer’s money.
European Union Seeks Additional Funding
European Union Affairs Commissioner Olli Rehn called for the euro’s finance ministers to consider increasing the zone’s existing rescue fund. In a separate matter, the European Commission has suggested that a tax be levied on the regions bank in order to raise 50 billion euros to fund the European Stability Mechanism. Widespread acceptance of community taxation has never been received favorably by euro zone members.
The effective lending capacity of the current European Financial Stability Facility (EFSF) should be reinforced and the scope of the its activity widened,” Rehn declared. The commissioner added that he was working to increase the size and scope of the EFSF. The euro zone’s finance ministers are set to meet next week.
France and Germany were cool to the increases in December. Both nations agreed the fund was already large enough. The two euro super powers hailed Portugal’s cuts but tempered enthusiasm by saying the country would have to show investors the cuts were in action before the April bond sale.
The model used in Greece and Ireland served as an immediate safety net but the long-term prognosis is not good. In particular, Greece will most likely have to renegotiate their debt, pressuring taxpayers and investors alike.
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