Markets warm to European debt, Portugal pressure eases

Wed Feb 1, 2012 10:13am EST
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By Marius Zaharia and Harry Papachristou

LONDON/ATHENS (Reuters) - Cautious optimism that the euro zone crisis may be turning a corner fuelled demand for European government debt on Wednesday, easing pressure on Portugal, seen as the most vulnerable country after Greece.

Portuguese bonds led a rally in debt issued by the euro zone's lower-rated states, capitalizing on a successful treasury bill auction and on increased confidence a deal to reduce Greece's debts to private bondholders will be clinched this week.

Ambitious economic reform programs announced by the new governments of Italy and Spain have helped improve market sentiment around the euro's future, although there are concerns that a deep recession in southern Europe may yet derail debt reduction efforts.

Meanwhile, there was fresh evidence that the European Central Bank's flooding of European banks with cheap, three-year money is easing lending among banks and improving investors' willingness to take risk.

Portugal, which many analysts believe will need a second EU/IMF bailout after Greece, proved its ability to tap short-term debt markets when it sold 1.5 billion euros of three- and six-month bills at lower yields. That helped bring down the market yield on its 10-year bonds from a record 17.4 percent on Tuesday to a still high 15.8 percent.

In Greece, Prime Minister Lucas Papademos sought backing from political leaders for more austerity measures, with the International Monetary Fund warning that long-term, cross-party commitment to reforms is key to securing a new bailout.

With a long-delayed agreement with private sector creditors to cut the country's debt by 100 billion euros nearly wrapped up, the EU, the IMF and Greece are racing to complete talks on a 130-billion-euro bailout by the end of this week.

"We need an agreement with political leaders for the negotiations with the troika," said a government official who declined to be named.   Continued...

<p>The European Union flag is pictured in a window reflecting a street in London in this October 26, 2011 file photo. REUTERS/Luke MacGregor</p>