Even if the MSM and government officials did not see this coming, you and I certainly did. Marketwatch reports:
Portuguese and Spanish officials scrambling Friday to head off speculation that Lisbon or Madrid could soon be forced to seek help to meet their borrowing needs.
A spokesman for the Portuguese government said a report in the Financial Times Deutschland newspaper — that Lisbon was under pressure from the European Central Bank and a majority of euro-zone countries to seek a bailout in order to ease pressure on Spain — was “totally false,” news reports said.
Meanwhile, Spanish Prime Minister Jose Luis Rodriguez Zapatero said in a radio interview that he “absolutely” ruled out a rescue for Spain, saying the nation’s deficit-reduction measures were well under way and that the economy, while still weak, has touched bottom.
OK, so Portugal and Spain continue to deny their need for a bailout or loans from the EU or IMF. Nothing new there. But the market disagrees:
The yield premium demanded by investors to hold 10-year Spanish bonds over German bunds widened to a record 2.63 percentage points as Spain’s 10-year yield continued to climb above 5.10%.
The cost of protecting Portuguese and other peripheral euro-zone sovereign debt against default through credit default swaps, or CDS, continued to rise.
The spread on five-year Portuguese CDS widened by 20 basis points to 500 basis points, according to data provider Markit. That means it would cost $500,000 annually to insure $10 million of Portuguese debt against default for five years, up from $480,000 on Thursday.
The euro fell to a two-month low versus the dollar to change hands at $1.3236 in recent action.
Portugal, with 10-year bond yields above 7%, was long seen as the next most likely candidate to seek a bailout after Ireland. Borrowing costs under the EFSF are seen at around 5% to 6% over three years.
Uh oh! As I wrote in a previous post:
Spain, Portugal, and Italy may not be in trouble, but if people start thinking they are “at risk,” they’ll withdraw their funds and it will become a self-fulfilling prophecy.
Technically speaking, Portugal and Spain may not need help right now, but they will most certainly need help if interest rates rise too much. But the report continues:
News reports, meanwhile, said that Germany this week rejected a suggestion by the European Commission to double the size of Europe’s 440 billion euro ($588 billion) bailout fund for euro-zone governments. The euro-zone contribution is part of the total €750 billion rescue program put in place with the International Monetary Fund in the spring.
Will Europe be willing and able to bail out Spain if it comes to that? Germany appears to be having second thoughts. Why should Germany waste its money bailing out another country? More so, how much money did Spain contribute to the bailouts of Greece and Ireland as part of the EU, money it no longer has to fix its own problems? Germany may want to keep its cash just in case it needs it.
In fact, Germany is one of the best fiscal situations in the entire world. Yet even it is balking. As Margaret Thatcher reported said, “The trouble with socialism is that eventually you run out of other people’s money.” Ireland and Greece have used up much of Europe’s money and good will. Now, there is a lot less left for Portugal and Spain.
Good luck Europe.