Spain, Portugal fight fear of Irish contagion
Spain and Portugal took a pounding on the markets on Friday even as they rejected fears of a domino-like cascade spreading from Ireland's still-unfolding banking catastrophe.
Ireland's government faced the wrath of voters in the first by-election since the banking emergency forced it to fall into the arms of the European Union and International Monetary Fund.
Market pressure already is building on Spain, which has an economy twice the size of that of Ireland, Greece and Portugal combined, with investors shying away from its debt unless they receive an interest rate premium.
Managers of funds handling huge sums of savings invested to finance governments doubt that bailout schemes put in place when Greece was rescued seven months ago could cope with rescuing Spain.
They warn increasingly in analyst notes to clients that if the crisis takes down Portugal and then Spain, the eurozone and single currency would have to be radically restructured and that demands by Germany for big changes are at the centre of market turmoil.
The gap between the rate on safe-bet German 10-year bonds and comparable Spanish bonds leapt to a record 2.60 percentage points in morning trade, adding to Madrid's problems in raising cash.
A few months ago the gap was 1.70 percentage points.
Spanish Prime Minister Jose Luis Rodriguez Zapatero "absolutely" ruled out the prospect of Irish-style rescue for Spain, which has a jobless rate of 20 percent and zero economic growth in the third quarter.
"I am not delivering a message of confidence just because I want to but because of concrete facts," Zapatero said in an interview with Catalan radio RAC 1.
Spain's public debt was considerably lower than the European average, he argued.
European Union figures show public debt averaged 74.7 percent of gross domestic product for member states in 2009, hitting 78.1 percent in France and 73.4 percent in Germany.
But in Spain the public debt amounted only to 53.2 percent.
"Those who make short term bets against Spain will be making a mistake," Zapatero said, adding that there was "no scenario" under which a rescue of Spain could be envisioned.
The European Union also stepped in to quash a report that European states were not pressing Portugal to seek aid to finance its debt, criticising certain EU leaders for stirring panic.
"No reference to an aid plan for this country has been asked for and none has been suggested," European Commission President Jose Manuel Barroso told reporters in Paris.
The Financial Times Deutschland reported that the European Central Bank and some eurozone countries were pressing Lisbon to tap the European Union's 500-billion-euro (664-billion-dollar) bail-out fund.
Lisbon rejected the report as totally false and Berlin stressed that there was no such pressure, although the Portuguese finance minister hinted that there was such talk in the background. The markets were clearly not soothed.
The 10-year bond rate for Portugal rose to a record high level of 7.121 percent and the gap between Portuguese and German bonds climbed to a near-record 4.54 percentage points.
Analysts warned any rescue for Spain could have vast consequences.
A former head of the German council of economic experts, Juergen Donges, told the Spanish daily El Economista that Spain's economy was nine times the size of Ireland's.
"If according to some calculations Ireland needs 80 billion (euros) then Spain would need 800 billion," Donges said.
"The European Financial Stability Fund does not have that much money so you would need either to give the plan more resources, which is not the solution, or tell Spain to fix things as best it can, which is not a remedy either," he added.
Negotiations on an international bailout for Ireland were expected to wrap up on Sunday, according to diplomatic sources in Brussels.
As polls closed in a by-election for the seat of County Donegal in northwest Ireland Thursday, Prime Minister Brian Cowen's Fianna Fail party was widely expected to lose its seat to the nationalist Sinn Fein party.
If they did lose the seat it would cut the coalition government's majority to just two seats.
Having built up a deficit equivalent to 32 percent of gross domestic product this year, Ireland is in talks to borrow about 85 billion euros (114 billion dollars) from the EU and IMF.
© 2010 AFP