The European Central Bank intervened to prop up the euro zone bond markets on Monday as political leaders and bankers warned the debt crisis was deepening amid fears Portugal was edging closer to an international bail-out.
Although European Union officials denied they were talking about a bail-out for Portugal, the ECB had to buy the country’s government bonds to stop the market selling off steeply before important debt auctions in Lisbon on Wednesday.
Investor attention is also turning towards Belgium, which has the third highest public debt-to-GDP ratio in the euro zone. The king of Belgium asked the country’s caretaker prime minister to draw up a tighter budget for 2011 than the one already agreed with the EU to ease market concerns over his country’s debt.
Alan Wilde, head of fixed income and currency at Baring Asset Management, said: “The crisis is reaching another key phase with debt auctions this week. It seems unlikely that Portugal can avoid a bail-out.”
Portugal’s cost of borrowing jumped to 7.18 percent for 10-year debt, close to euro-era highs at one point before intervention by the ECB saw yields fall back to close at 7.01 percent. This is significant as officials in Lisbon have admitted that yields above 7 percent are unsustainable.
The euro fell to four-month lows against the dollar, sterling and the yen, and a key gauge of sentiment among euro zone banks that measures the cost to insure debt rose to the highest levels since March 2009. Increasing worries about the euro zone prompted Josef Ackermann, Deutsche Bank chief executive, to call on euro zone governments to use the debt crisis as an opportunity to lead the bloc towards greater economic integration.
“The time has come to deepen economic and currency union,” Germany’s most influential banker said in a speech in Berlin late on Monday. “For this renewed push towards integration we need strong political leadership.”
In Brussels, Amadeau Altafaj-Tardio, the EU spokesman for economic and monetary issues, referring to a potential Portuguese bail-out, said: “There is no discussion to this effect. And none is envisaged at this stage.”
In Portugal, political rhetoric in campaigning for Lisbon’s presidential election on January 23 is adding to pressures on the government, with the main opposition party calling on José Sócrates, the prime minister, to resign if he has to ask the international community for help.
The centre-right Social Democrats (PSD) had earlier backed his deficit-cutting measures.
Pedro Passos Coelho, the PSD leader, said Mr Sócrates would be responsible for a “serious political failure” if Portugal had to ask for outside help and would “no longer be in a position to govern”.
In a further blow to Mr Sócrates, António Bagão Félix, a respected former finance minister and rightwing politician, said on Monday that it was no longer a question of “if” Portugal would have to turn to the European financial stability facility, the EU bail-out fund, for help, but “when”.
The cost to the country of high bond yields was increasing every day, he said. “The situation is unsustainable.”
EU officials have expressed concern over the potential adverse impact on investors of the heated rhetoric leading up to the presidential election, in which Aníbal Cavaco Silva, the candidate supported by the PSD, is expected to be re-elected for a second five-year term.
But Mr Passos Coelho, who has given his party a strong lead in national opinion polls, said it was necessary to “turn the page” and elect a new government with better policies to create jobs and stimulate economic growth.
The PSD has grown increasingly critical of Mr Sócrates’s handling of the debt crisis, accusing him of “merely pretending” to cut government spending.