Fears of contagion from the euro zone crisis were running high Friday, knocking down stock and bond prices, but correlations between markets suggested investors were not nearly as afraid of a systemic crisis as they were back in May and June.
Back then, the panic over Greece's debt problems was at its height and although now yields on Portuguese and Spanish 10-year debt are at record highs near 7 percent and 5 percent, while Ireland is negotiating an international bailout, the euro has not reacted strongly.
The euro remains strong historically. At around $1.32 and despite a roughly 7 percent fall over the past three weeks, it is still close to 13 percent stronger that it was at the depth of the Greek crisis.
It is far above its lifetime average of $1.188, and above its average for the past 200 days, which is a key level for currency traders and is now at $1.3131.
Nor does market positioning imply fears of a currency zone break-up. The latest Commodity Futures Trading Commission figures actually show a small net long position in the euro.
Investors were bracing for painful bond swaps, as expectations rose that top bondholders in Irish banks will be offered the chance to swap billions of euros of debt for new bonds, realizing a loss and taking a share of Ireland's pain but avoiding a potentially worse fate.
One strategist said that forcing bank bondholders to take a hit would be a "nasty, if situationally understandable" precedent.
Analysts said such tenders have been used successfully by Irish and other European banks during the financial crisis.
These have allowed them to buy back bonds at a premium to their market price but at a discount to nominal value, saving them money and forcing bond investors to take a so-called "haircut."
Voters hammered the government's parliamentary majority in elections, punishing Ireland's austerity drive.
Portugal Denies Bailout
Expectations increased that senior bondholders in Bank of Ireland, Allied Irish Banks and nationalized Anglo Irish Bank would have to bear some of the distress after The Irish Times said the IMF and European Union have been examining ways of spreading the bailout costs.
Investor nervousness grew after the report, with prices of Irish and European bank bonds falling sharply. There were no bids for Allied Irish or Bank of Ireland senior debt, with liquidity in the market drying up.
Market jitters were increased by a report overnight in the FT Deutschland that the European Union insists that Portugal accepts a bailout.
Portugal, whose parliament approved an austerity budget Friday, denied the report.
"This news article is completely false, it has no foundation," said a government spokesman. Lisbon is passed an austere 2011 budget that it hopes can deliver tough spending cuts to ward off the euro zone debt crisis.
European Commission President Jose Manuel Barroso, a former Portuguese prime minister, said there was no talk of a bailout for his home country.
"I can tell you that it's absolutely false, completely false," he said in Paris, adding that an aid plan for the country had neither been requested nor suggested.
Spain Also Denies
A Reuters poll of economists this week found a majority expect a bailout.
"The market is now assuming a bailout for not just Portugal but also Spain, but it is moving slowly with the officials reluctant to concede it will happen," said Peter Chatwell, a rate strategist for Credit Agricole in London.
Spain, in its turn, denied it will need a bailout.
There is absolutely no chance Spain will need outside help to manage its finances and the country has no plans to introduce extra fiscal measures, Prime Minister Jose Luis Rodriguez Zapatero said.
Investors should think twice about betting against the country, he added, telling private regional broadcaster RAC1 radio: "Those who are taking short positions against Spain are going to be mistaken".
The spotlight may turn to another euro zone country with high debt: Belgium. The country of 11 million, home to the European Union's executive, has a debt to gross domestic product ratio of 100 percent and has been without a government since June.