Markets upbeat despite Portuguese bailout fears

AP News
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Posted: Mar 25, 2011 7:44 AM
Markets upbeat despite Portuguese bailout fears

Markets brushed off concerns over the financial future of Portugal as EU leaders looked to thrash out the final details of a package designed to deal with a government debt crisis that has already seen Greece and Ireland get bailed out.

Though Portugal's borrowing costs in the markets rose to fresh euro-era highs Friday, the markets were serene Friday. The yield on Portugal's ten-year bonds spiked to 7.8 percent _ an unsustainable level _ as investors appeared to think it's inevitable that the cash-strapped country will end up being the third bailout victim in the eurozone.

Both Fitch and Standard & Poor's warned Thursday that the country would find it more difficult to tap bond market investors in light of the political turmoil in the country.

On Wednesday, Portugal's Prime Minister Jose Socrates resigned after the opposition refused to vote for additional budget cuts and revenue increases aimed at cutting the governments deficit. He is still in office as a caretaker, but many analysts say Portugal will need financial help before a new government can be elected.

Elsewhere though, markets were taking it all in stride. The euro remained well-supported above $1.40 _ a long way above the $1.18 trough it hit last summer when Europe's debt crisis seemed to threaten the existence of Europe's single currency experiment.

By mid morning London time, the euro was trading 0.1 percent higher at $1.4161.

"Without a doubt the combination of credit ratings downgrades and political crisis surrounding a euro member would have been enough to send the euro into free fall during 2010," said Jane Foley, senior currency strategist at Rabobank International.

Hopes that Europe's debt crisis may not spread elsewhere was evident in the performance of Spanish government bonds _ the yield on its ten-year bonds was down another 0.1 of a percentage point at 5.15 percent. In the hierarchy of Europe's indebted, Spain is widely considered to be in the most perilous situation after Greece, Ireland and Portugal.

"In the absence of a new wave of fears concerning Spain, the euro looks to be dismissing the Portuguese crisis as a sideshow," Foley said.

Analysts said the more optimistic tone in the markets was directly related to hopes that Europe has finally gotten a handle on the magnitude of its debt crisis after a shaky start. Measures for better budgetary discipline across the eurozone as well as increasing the size and scope of the EU rescue fund are set to be approved later Friday in Brussels.

In the stock markets, worries over Portugal's immediate future were minimal and share prices continued to gain on the heels of a solid end to the week in Asia.

"The U.S. is set to release the third estimate of the last quarter's GDP data and, barring any shocks here, it all looks set to be a positive finish to the week," said Ben Critchley, a sales trader at IG Index.

The consensus in the markets is that the world's largest economy grew by an annualized rate of 3 percent during the quarter, up modestly from the previous estimate of 3 percent.

Investors' appetite for riskier trades, such as stocks, has been weighed down in recent weeks by the confluence of alarming events around the world. On top of Japan's natural disasters, investors had to grapple with the potential implications of a nuclear meltdown and the escalating conflict in Libya.

In Europe, the FTSE 100 index of leading British shares was up 0.4 percent at 5,902 while Germany's DAX rose 0.4 percent to 6,963. The CAC-40 in France was 0.3 percent higher at 3,979.

Wall Street was poised for a solid open _ Dow futures were up 41 points at 12,157 while the broader Standard & Poor's 500 futures rose 5.1 points to 1,310.20.

Earlier, the Nikkei 225 in Tokyo closed up 1.1 percent to 9,536.13 while Hong Kong's Hang Seng index rose 1.1 percent to 23,158.67 and South Korea's Kospi ended 0.9 percent higher to 2,054.04.

Meanwhile oil prices traded in fairly narrow ranges, with the benchmark New York rate up 23 cents at $105.33 a barrel.

Crude prices have jumped 25 percent since anti-government protests in Libya that began last month shut down most of the OPEC nation's crude output. Western-backed military operations have pounded Libyan strongman Moammar Gadhafi's forces to prevent them from attacking civilians, but rebels have so far been unable to mount an offensive to overthrow the regime.

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Pamela Sampson in Bangkok contributed to this report.