Bond traders say the European Central Bank has thrown Portugal a temporary lifeline by buying up its bonds. The move came as pressure appeared to mount on Portugal to seek an international bail-out soon.
A senior euro zone source said on Sunday that Germany, France and other euro zone countries were pushing Portugal to seek an EU-IMF assistance programme, following Greece and Ireland, to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area.
But the European Commission today denied reports that Portugal was under pressure. 'There are no such talks and there are not even any plans to have any such talks, whether it is about Portugal or another euro zone member state,' the commission's economic affairs spokesman, Amadeu Altafaj, told a news briefing.
The interest rate premium on Portuguese sovereign debt fell back today to just over 7% after rising sharply late last week as traders said the ECB intervened to buy government bonds on the secondary market. EU sources say the central bank has not yet bought Spanish government debt.
Altogether, the ECB has bought nearly €74 billion in troubled euro zone sovereign bonds since it began intervening to stabilise the market last May. Last week's purchase of €113m was the smallest since October.
German Finance Minister Wolfgang Schauble denied that his country was pushing anyone to seek assistance, but he said it was defending the euro. A French government official also said it was nonsense to say Paris and Berlin were pressuring Portugal.
But economists and market analysts see it as only a matter of time before high-deficit Portugal, with a stagnant economy that has lost competitiveness since joining the euro area, has to seek aid. Portugal and Spain return to bond markets later this week for the first time in 2011.
European finance ministers are due to consider a more comprehensive response to the debt crisis at their next monthly meeting on January 17-18. A German Finance Ministry spokeswoman said Portugal was not on the agenda, but a euro zone source said informal exploratory talks had already begun.
Portuguese Prime Minister Jose Socrates said last Friday his country had no need of outside assistance because it was ahead of schedule in reducing its budget deficit. Socrates, who heads a minority socialist government, is stubbornly avoiding a bail-out, mindful of the traumatic history of Portugal's two International Monetary Fund rescues since its return to democracy in 1974.
Meanwhile, European Central Bank chief Jean-Claude Trichet says world central bankers have stressed that budgetary 'soundness' was important in maintaining a healthy global economy.
'The message for all economies is to have sound fiscal policies,' he stressed after a regular bi-monthly meeting of a group of major central bankers at the Bank for International Settlements.
