In Europe, concerns about the euro remain prevalent. According to Financial Times Deutschland, the European Central Bank and several Euro-zone nations are asking Portugal to follow Ireland’s lead by applying for bailout. Tensions on the Korean peninsula further boosted the appeal of the greenback.
Joseph Capurso from the Commonwealth Bank of Australia said that, “Portugal and Spain have shaky government finances, so their bond markets might go through a period of selloff. In that sort of environment, you would expect the euro to sell down further.” The common currency has declined by 2.9 percent several weeks ago.
One of the main reasons why Portugal is being asked is to reduce the pressure on Spain. Borrowing costs for EU’s indebted nations are surging because of Ireland’s capitulation in accepting bailout. This move also stoked speculations that other nations might eventually have to seek aid. Average yield on a 10-year from Portugal, Ireland, Greece, Spain, and Italy have reached 7/52 percent, a record.
Meanwhile, Irish Finance Minister Brian Lenihan revealed that the final size of the bailout from the International Monetary Fund and European Union is not yet known although 85 billion euros has “been mentioned.” The government intends to cut spending by 20% even as it raises taxes in over the next four years.
Despite these best efforts, the Irish bailout and austerity plan was not sufficient to calm the jittery market. Investors are now turning their attention to Portugal. David Forrester of Barclays Capital based in Singapore said that, gains in euro-area bond yields relative to Germany’s places “downward pressure on the euro.”
The additional yield that is demanded by investors to hold Irish 10-year bonds rose to 6.32 percentage points while Portugal’s rose by 4.31 points against their German counterparts. Overall, European research institutes expect that recovery will remain “tentative” in the next two years. It also faces setbacks if debt worries aren’t resolved.
