A resolution of the debt crisis in Ireland may shift the burden of speculation in Portugal.
While officials such as the European Central Bank Vice President Vitor Constancio predict a ransom of Ireland reduce financial pressures in the euro region, analysts at Citigroup Inc. and Nomura International Plc said that any help would be short lived because investors turn their attention to the following weaker peripheral nation.
Markets indicate that the country is Portugal, with yields of 10-year bonds of 6.88 percent, compared with 8.26 percent in Ireland and 11.62 percent in Greece, which received bailout funds from the EU in May European and International Monetary Fund. Portuguese Finance Minister Fernando Teixeira dos Santos, 15 November, said that while "there is a risk of contagion," that does not mean that the country will seek financial assistance.
"Portugal is the situation now, because of Ireland," said Steven Mansell, director of interest rate strategy at Citigroup Global Markets Ltd. in London. "If Spain reached an agreement to take advantage of the European Financial Stability Fund or some other mechanism to support its banking sector, I do not alleviate the pressure on Portugal."
The government has forecast economic growth in Portugal will slow to 0.2 percent in 2011 from an estimated 1.3 percent this year. Portugal has made less progress in taming the deficit of some of the peripheral countries. In the first nine months, the central government deficit rose 2.3 percent from a year earlier. That compares with a fall of more than 40 percent in Spain and over 30 percent in Greece.
Record yields
While Portugal has no plans to sell more bonds this year, market watchers called pushed up yields on its debt last month amid questions about the country's efforts to reduce the budget deficit. The 10-year yield reached a record of the euro was 7.25 percent on Nov. 11, 484 basis points above benchmark German bonds of similar maturity.
Portuguese 10-year yields were little changed this week, while yields of Ireland fell by 10 basis points. The spread between 10-year Portuguese and German bonds rose 6 basis points to 410 today.
Investors pushed up yields to alter government policy known as vigilantes, a term coined in 1984 by economist Edward Yardeni, president of Yardeni Investments Inc. in New York. Attributed to them forcing Bill Clinton to reduce the U.S. deficit after he came to power in 1993, helping to push Treasury yields to 10 years to around 4 percent in November 1998 by over 8 percent in 1994.
While the Irish and Portuguese bonds will probably rise to a bailout deal for Ireland, the gains would not change the underlying problems of peripheral Europe, according to Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank.
Greece Ireland
"Wait a couple of weeks and the markets will just go to another person, with Portugal in front of the queue", based in London said Diebel. "The guards pushed to Ireland in the same situation as Greece is in. Why the conclusion that it will do the same in Portugal?"
debt crisis in Ireland was caused by the rising cost of rescuing the country's banks, including Anglo Irish Bank Corp. and Allied Irish Banks Plc. While Portugal does not face a crisis in the financial sector, which has a debt burden and the country's largest with nearly 10 million euros of debt that matures during the first half of 2011.
Teixeira dos Santos, the finance minister said in Parliament two days ago that Portugal wants to continue funding itself in the markets.
"It is significant that at risk '
"Portugal needs more money to Ireland not because they go to market on a regular basis," said Nick Firoozye, head of interest rate strategy at Nomura in London. "The market can go to Portugal at some point because it is much risk."
While Ireland began to cut spending in 2008, Portugal has been slower to address its fiscal deficit, the fourth largest in the euro region, and the government failed to reach an agreement with its largest opposition party The 2011 budget plan until late last month.
Portugal has proposed to reduce their wage bill for civil servants by 5 percent, freeze recruitment and increase the value-added tax called by 2 percentage points to 23 percent.
The government expects exports, such as paper and wood products to support the expansion. Portugal's economy unexpectedly grew 0.4 percent in the third quarter of the last three months, exceeding economists' estimates of a contraction, as exports rose and imports grew at a slower pace.
However, the Organization for Economic Cooperation and Development yesterday forecast the economy will move to a contraction of 0.2 percent next year.
"His point of view of fiscal consolidation remains based on overly optimistic growth projections," Mansell said of Citigroup. "Portugal is highly dependent on the fate of their neighbors and it takes a great stretch of the imagination to see growth remaining buoyant."
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