Germany May Soften Objections to Euro Fund Increase

Germany may soften its opposition to expanding the region’s 750 billion-euro ($966 billion) rescue facility as Belgium’s political deadlock sent borrowing costs surging and the European Central Bank bought Portuguese bonds.

The cost of insuring against default on European sovereign debt climbed to records and European stocks fell amid concern Portugal is next in line for a bailout. Portuguese securities reversed declines after three traders with knowledge of the deals said the ECB purchased the government’s bonds.

With European governments including Portugal and Spain due to borrow at least $43 billion this week, attention is shifting to whether Europe is doing enough to stem the crisis. Chancellor Angela Merkel was today forced to deny that Germany was pushing Portugal to seek a bailout to alleviate the market pressure.

“Our policy is not to impose anything on any country,” Merkel said in the Maltese capital, Valletta.

“There’s an offer on the table to help,” yet asking for aid is “a free decision for each country,” she told reporters. “Portugal hasn’t done it and isn’t being pressed in that direction by Germany.”

The cost of insuring Portuguese bonds against default rose to a record today, while Belgian and Spanish bonds declined on funding concerns. The benchmark Stoxx Europe 600 Index lost 0.9 percent to 278.48 at the 4:30 p.m. close in London, the biggest drop since Dec. 30.

For the first time, investors view western European government bonds as riskier than emerging-market debt, the Markit iTraxx SovX Western Europe Index of credit-default swaps showed last week.

‘Just Not Sustainable’
“Markets won’t stay at these levels because that’s just not sustainable and if they widen much further, then we’ll soon have rescue packages for Spain and Portugal,” Erik Nielsen, chief European economist at Goldman Sachs Group Inc., said in a research note yesterday.
Merkel’s chief spokesman, Steffen Seibert, declined to repeat German objections to restocking the rescue fund after the Handelsblatt newspaper reported European Union leaders may discuss the matter in February.

“No decision has been taken about widening the rescue fund,” Seibert said by telephone yesterday. “We should note that only a small part of the available funds has been tapped.”
Merkel has up to now opposed expanding government-funded help for debt-plagued euro nations, saying as recently as Dec. 6 that she sees no need for additional aid.

Germany, France and other top-rated nations risk having their credit downgraded in the event that policy makers expand bailout funds, Stephen Jen, a managing director at BlueGold Capital Management LLP, said in a note today.

Bonds Rebound

Portuguese 10-year bonds rose, reversing declines, with the yield falling 26 basis points to 7.13 percent after rising as high as 7.45 percent earlier. The yield on Belgian 10-year notes climbed nine basis points to 4.22 percent at 4 p.m. in London after touching the highest since 2009.

Spanish five-year note yields rose seven basis points to 4.97 percent. Ten-year German yields were little changed at 2.87 percent.

Credit-default swaps on Portugal jumped 11 basis points to a peak of 549, Ireland soared 26.5 to an all-time high 682 and Belgium was 7 higher at a record 255. That helped push the Markit iTraxx SovX Western Europe Index of swaps on 15 governments to a record 223 basis points.

EU leaders may discuss expanding the temporary rescue fund when they next meet for a summit in February, Handelsblatt reported, citing German government officials it didn’t identify. The EU could time such a pledge to coincide with granting aid to Portugal, Der Spiegel magazine reported in this week’s edition.

Talks Not Envisaged

There are “no talks going on, nor envisaged to begin” about Portugal tapping the EU’s crisis-resolution facility, Amadeu Altafaj, spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn, said today in an e-mailed statement.

The euro has dropped 10.7 percent against the dollar over the past 12 months as investor concern over the debt levels in some euro-area states drove bond yields to records. The euro fell to $1.2867 today, the weakest level since Sept. 14, before rising 0.2 percent to $1.2933.

France and Germany will push Portugal to accept aid as officials in the two countries doubt the government in Lisbon can raise money on capital markets much longer, Spiegel said.
Aid for Portugal should coincide with an agreement by the euro-area countries to provide all means necessary to safeguard the monetary union, including unlimited funds to expand the bailout facility if required, the Hamburg-based weekly said.

King Albert

In Brussels, King Albert II postponed until tomorrow a planned meeting with Johan Vande Lanotte, author of a constitutional compromise that last week failed to jump-start seven-party coalition talks almost seven months after inconclusive federal elections.

Vande Lanotte, a Socialist from the richer Flanders region, awaits a royal response to his plea to be relieved of the job of trying to shepherd the four Flemish and three French-speaking parties back to negotiations that were broken off on Sept. 3.

“Financial markets will be merciless if the country doesn’t extricate itself from this unprecedented hell as soon as possible,” billionaire financier Albert Frere told Le Soir newspaper.

Greece, which triggered the crisis, reported today that its central budget deficit contracted 36.5 percent in 2010. While that beat the target reduction of 33.2 percent, the 5.5 percent increase in net revenue fell short of the 6 percent target.

To contact the reporters on this story: Tony Czuczka in Valletta, Malta via aczuczka@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net