November 30, 2010

Portugal’s Banks in Danger; Euro Zone Bonds Hammered

Banks face 'intolerable risk' as spreads on Spanish, Italian bonds hit records

Tuesday morning the Bank of Portugal issued a financial stability report that warned the government to bring its public spending under control. Otherwise, the report said, “[t]he risk will become intolerable if we do not see the implementation of measures that consolidate public finances in a credible and sustainable way.”

The dire nature of the warning, according to a Reuters report, signaled dissatisfaction with the reduction of the nation’s budget; the core state sector deficit has grown year-to-date to 1.8%. In 2011 the goal is to cut the budget deficit from 7.3%, its current level, to 4.6% of GDP through a combination of tax increases and pay cuts of 5% for civil servants.

Lisbon saw its risk premium rise again as its stocks dropped, led by its banks.

Portugal was not the only nation whose bonds suffered in the markets on Tuesday. Risk premiums on Spanish and Italian bonds, said Reuters, hit euro-lifetime highs and even the borrowing costs of Belgium and France, not currently in the markets’ crosshairs, rose. Belgian bonds too hit a euro-lifetime high as investors looked farther down the line of euro zone countries.

Although Portugal still says it is not in need of a bailout, markets aren’t listening. The euro dipped below $1.30 in early trading, and European banking shares dropped, and gold rose against the euro to a new high.

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