Debt turmoil, contagion fears sweep Europe

Illustration: Market Oracle

LISBON, Portugal – Europe struggled mightily Friday to keep the debt crisis from engulfing country after country. Portugal passed austerity measures to fend off the speculative trades pushing it toward a bailout and Ireland rushed to negotiate its own imminent rescue.

As Portugal and Spain insisted they will not seek outside help, creating an eery sense of deja-vu for investors, Europe braced for what seems inevitable — more expensive bailouts.

The Portuguese Parliament approved an unpopular debt-reducing package, including tax hikes and cuts in pay and welfare benefits. But while that helped to avoid a sharper deterioration in bond markets, the sense among analysts was that the move had only bought a little time.

Adding to the pressure, Ireland’s major banks were hit with credit downgrades — one to junk bond status — as speculation mounted that the EU-IMF bailout of Ireland, to be revealed within days, would require investors to take losses, a possibility earlier denied by officials.

“This confusing `pea-soup’ of indecision, vacillation and disunity by the EU is beginning to create unnecessarily seismic waves of fear in international bond and money markets,” said David Buik, markets analyst at BGC Partners.

Yields in fiscally weak eurozone countries remained near record highs Friday, stocks slumped across the board and the 16-nation euro lost another 0.8 percent on the day to trade at $1.3241, just off two-month lows.

Portugal’s high debt and low growth have alarmed investors, but the government insists it doesn’t require an international rescue — a line ominously reminiscent of claims by Greece and Ireland before their massive rescues.

Analysts say markets need more reassurance from EU leaders that the rot can be stopped in Portugal before spreading to Spain, the continent’s fourth-largest economy — a scenario that would threaten the 16-nation euro currency itself.

The financial crisis took a step in that direction this week, as it increasingly becomes apparent that bond investors will not be pacified by austerity measures but want weak countries’ public finances to be plugged once and for all. Greece, which accepted a bailout six months ago, and Ireland are still far from being able to return to international debt markets.

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