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01/10/2011
Euro Falling on Contagion Fears
Pressure Mounts for Portugal Bailout

AFP
The euro symbol in front of the European Central Bank headquarters in Frankfurt.
Germany and France want to push Portugal to seek a bailout from the EU's rescue fund in order to stop the debt crisis from spreading to countries like Spain and Belgium, according to reports from SPIEGEL and Reuters. Portugal on Sunday denied any such pressure, but the euro is falling on fears of contagion.

The euro fell to a four-month low against the dollar at $1.2860 on Monday following mounting concern that Portugal will become the next euro zone member to seek a bailout, after reports by SPIEGEL and the Reuters news agency said German and France were pushing the highly-indebted country to seek financial help.


According to SPIEGEL, Germany and France want to urge Portugal to seek a bailout as soon as possible from the €750 billion ($968 billion) rescue fund set up last May by the European Union and International Monetary Fund. The report in the latest edition of SPIEGEL published on Monday said experts from both governments did not think Portugal will be able to borrow funds on the capital markets much longer.

The fact that Portugal had to pay an interest rate of 3.69 percent for six-month bonds it issued last week was being seeing as an alarm signal in Berlin and Paris, SPIEGEL reported. Germany on the same day issued a 10-year bond for just 2.87 percent.

Officials in Berlin are saying Portugal must now quickly seek aid because this is the only way to prevent the crisis from spreading to other countries with high debt levels, such as Spain and Belgium, SPIEGEL reported.

Berlin wants the Portuguese bailout to coincide with a commitment from euro member states that they will make available whatever funds are needed to rescue the single currency, and are ready to provide the rescue fund with unlimited financing.

Portuguese Resistance

The SPIEGEL report said that German Finance Minister Wolfgang Schäuble met his French counterpart Christine Lagarde in Strasbourg last Friday to discuss the euro.

Both know that it will be difficult to persuade Portugal to accept help because the deputy president of the European Central Bank, Ribeiro Constancio, is Portuguese, as is Commission President Jose Manuel Barroso.


A spokesman for the Portuguese government on Sunday denied that it was under pressure by France and Germany to seek a bailout.

Also on Sunday, the Reuters news agency quoted a senior euro zone source as saying pressure was growing on Portugal from Germany and France to seek help. Portugal will be closely watched on Wednesday when it will attempt to sell up to €1.25 billion of five- and 10-year debt.

Analysts say that if the interest rates Portugal has to pay on that debt are deemed too high by investors, Portuguese bonds may sell off quickly and force the country to seek emergency help.

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