Investors pay record costs for Portuguese and Irish debt
Published 11/01/2011 | 05:00
Investors holding Portuguese and Irish government debt were forced to pay record costs last night to insure against losses if either country defaults.
The development came as concerns grew that Portugal is on the brink of following Ireland and Greece in seeking an EU/IMF rescue deal.
Last night bondholders paid a record 5.55pc per year to insure against losing money if Portugal defaults. It means they are paying more than a half a million per year to insure €10m of bonds. The cost of insuring against a default by Ireland also hit an all-time high of 6.75pc.
The trend put the euro-area debt crisis back into sharp focus, particularly over the "domino theory" -- that if Portugal needs to be rescued Spain will follow.
With the crisis still live, the euro fell to a four-month low against the dollar of $1.2867 yesterday.
Portugal is due to borrow up to €1.25bn tomorrow. The yield, or interest, lenders are charging to lend to the country over 10 years climbed to 7.4pc last Friday and remained above 7pc all day yesterday. The yield stayed high even after the European Central Bank bought Portuguese bonds in an effort to stabilise prices.
The 7pc level is seen as a critical benchmark. Greece was forced to accept a rescue after the yield on its 10-year debt stayed above 7pc for 16 days. Ireland accepted outside help 20 days after the yield on Irish 10 year bonds passed the 7pc level.
Yesterday German Chancellor Angela Merkel was forced to deny that she was pushing Portugal to seek a bailout to alleviate market pressure.
A spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn said there were "no talks going on, nor envisaged to begin" about Portugal tapping the rescue facilities.
Those denials will do little to reassure most investors, though, after the announcement of a bailout deal for Ireland followed weeks of denials about the scale of the crisis here.
It all focused attention back on whether Europe is doing enough to stem the crisis.
Worryingly for the Portuguese, the European Central Bank said last night that it bought just €113m of government bonds last week. Despite the pressure on Portugal, it was the lowest total for some time -- less even than the €164m bought in Christmas week.
The latest purchases take the total of debt bought by the ECB to €74bn but raise large questions over what support, if any, its programme is giving struggling countries.