Breathing space for Euro but crisis continues
The hard-pressed Euro enjoyed some respite yesterday as a three-day sell-off eased and the currency rose against sterling and the dollar.
Markets were relieved that an auction of Portuguese government debt, usually a routine event that would be scarcely noticed by the media – even in Portugal itself – had passed off without too much incident. The Portuguese debt management agency sold €500m (£419m) of 12-month Treasury bills at an average yield of 5.3 per cent – up from the 4.8 per cent for a similar auction in November. Many also chose to read into remarks by the European Central Bank's president, Jean-Claude Trichet, a new willingness to buy more government bonds issued by the troubled peripheral eurozone economies.
Mr Trichet said on Tuesday night that "pundits are under-estimating the determination of governments".
Although the deliberate monetisation of government debt is against the ECB's statutes, many dealers felt that the ECB may soon be forced into such desperate measures.
Some correction in the euro's slide might also have been overdue, given that the single currency has lost 7.5 per cent of its value in a little over a week. Bullish data on the German economy also helped sentiment. The additional risk premium demanded by investors to hold Portuguese and Spanish government debt over the German equivalent narrowed in trading yesterday, although the interest rates remain at historically distressed levels.
Rates of almost 12 per cent in Greece, for example, are strongly suggestive of another crisis, while the 5.5 per cent yield on Spanish bonds are not far off the 6.5 per cent "tipping point" where, economists argue, Spain's debts become unsustainable.
Bank stocks and equities more generally were up in sympathy with the euro, which climbed back over the $1.30 mark. The Euro Stoxx 50 index of eurozone blue chips ended up 2.7 per cent and the Spanish Ibex 35 rose 4.4 per cent. In an attempt to boost credibility, the Madrid government announced new efforts to reduce its debts, including partial privatisations of the state lottery and both Madrid and Barcelona airports.
The pressure on the euro even eased after a German minister declared that there was no reason "in principle" why a eurozone nation could not become insolvent, the very thing many fear.
The German Economy minister, Rainer Brüderle, added that he thought Portugal and Spain were not going to need help, despite BBC reports that British officials believe the question of a Portuguese bailout is a matter of "when" not "if". The Portugese Prime Minister, Jose Socrates, denied that he would ask for aid.
A bailout of Portugal has been priced in by the debt market for some time and the ratings agency S&P has put its A-minus rating on review for possible downgrade. Mr Brüderle tried to reassure German taxpayers that a eurozone member nation could be left to default in theory and that any rescue deals required unanimity and could not be pushed through "against the will of Germany. Our taxpayers won't go along with everything".