A closely watched Portuguese bond sale proved successful today, offering Lisbon and the eurozone a brief respite from expectations that it will follow Greece and Ireland in requesting an economic bailout.
Yet many analysts say Portugal’s large deficit and lack of immediate growth capacity mean that its bond victory only delays the prospect of bailout, which many worry could cause a “domino effect” that will put larger deficit-addled states like Spain and Italy in serious financial straits.
Indeed, Spain and Italy will hold their own bond offerings tomorrow that will be seen as significant economic bellwethers.
The Portuguese bond auction was "a success," says Philippe Waechter, chief economist of Natixis Asset Management in Paris. "But it is only the first stage. Tomorrow Spain and Italy will have to issue more bonds. In fact, during 2011 ... a lot of money will have to be borrowed by eurozone members, and it is not sure there will be enough lenders."
European markets were largely on hold over the holiday season, but were expected to roar back this week, with investors seeking weakness in states like Portugal that have high rates on their debt.
Today’s bond issue was seen as a litmus test. If successful, Portugal could buy some time. If not, it would need to ask the European Commission for bailout funds from a $1 trillion package set up last spring during the Greek debt crisis.
The Portuguese respite is now being attributed to several factors: Lisbon's austerity programs, the European Central Bank's robust buying of state bonds, and recent Chinese and Japanese assurances of support for the European debt market.
French finance minister Christine Lagarde offered guarded encouragement about today’s sale: "Portugal, like all European countries is battling to reduce its deficit and decrease its debt,” and is “producing results better than the commitments it made, and I think that's reassuring for investors."
Ahead of today's sale, Portuguese Prime Minister Jose Socrates insisted that Portugal would not need a bailout.
However, Portugal’s combination of consumer, corporate, and public debt are extensive. Despite the sale, Portugal must borrow nearly $6 billion in March and more than $8 billion in April – and Lisbon this week issued a forecast of partial recession later this year.
“The Portuguese economy is heavily dependent on public spending,” notes Mr. Waechter. “For the moment they are not calling for a bailout, but I think they should. That would send a clear signal to the market.”
Estimates of a Portuguese relief package now being considered unofficially in Brussels runs from $70 to $130 billion.
Critics of the EU approach to bailouts include Nouriel Roubini, who, in an interview with German media today, said the recent preoccupation in Berlin and Brussels with a “permanent stability mechanism” that governs bailouts after 2013 does not answer immediate problems for Europe.
“What the euro countries decide for 2013 is completely inconsequential. Forget 2013! The important thing is what will happen in the next three months in Portugal, Spain, Italy, and France. I can't fathom how the EU member states can hold a summit entirely preoccupied with what will happen after the present rescue package runs out, without once mentioning what they intend to do now to help Portugal and Spain,” he said.