Spain and Portugal take center stage

By Charles Riley, staff reporter


NEW YORK (CNNMoney.com) -- Worries about the health of some European economies, specifically Spain, Portugal, and Ireland are rearing their ugly head.

And that's put pressure on markets around the globe, with European and Asian stocks selling off on Friday. That sell-off spilled over into the U.S. markets, where stocks were trading lower in an abbreviated session.

Britain's FTSE 100 lost 1.1%, the DAX in Germany dropped 1.0% and France's CAC 40 dipped by 1.5%.

The once-mighty euro is also taking a beating, falling nearly 1% against the U.S. dollar as investors flee for safe-haven assets. The dollar index, which gauges the greenback against a basket of currencies, moved to its highest level in two months.

Meanwhile, yields on Irish government bonds spiked, with the yield on the benchmark 10-year bond breaking the sky-high 9% barrier. By comparison, Spain's 10-year bond yield stands at 5.2%, while Portugal's 10-year sits at 7.2%.

The way the markets are reacting is largely pegged to the outstanding question of timing, said Ken Wattret, an economist with BNP Paribas in London.

"The issue is how long it takes to clarify who gets assistance, and how credible those [bailout] programs are," Wattret said.

Irish banks under pressure

Ratings agency Standard & Poor's lowered the credit rating on four Irish banks Friday, one to junk status. S&P questioned the Irish government's ability to prop up the banks as well as the underlying health of the Irish economy.

S&P cut Anglo Irish Bank Corp. to B/B from BBB/A-2, putting the bank's bonds in"junk" or high risk status.

Allied Irish Banks (AIB) and Irish Life and Permanent each had their credit rating cut one notch, to BBB from BBB+. The Bank of Ireland (IRE) was cut one notch from to BBB+ from A-.

"The Irish government's ability to provide further extraordinary support to these banks has weakened," the rating agency said in a statement. "We expect no near-term respite and we believe the prospects for these banks to return to near stand-alone funding profiles in the medium term are receding."

Portugal and Spain in denial

European Commission president Jose Manuel Barroso, a former Portuguese prime minister, denied that Portugal was being pressured by the European Commission to request a bailout, according to media reports Friday.

"It's absolutely, completely false, every reference for an aid plan for this country. It has neither been asked for and neither have we suggested it. It is absolutely false," Barroso said at an Organization for Economic Cooperation and Development conference.

Spain's major banks have a great deal of exposure to Portugal's debt, although the exact amount is not certain. So there are worries that the sovereign debt crisis in Portugal could spill over into Spain.

But Spanish Prime Minister Jose Luis Rodriguez Zapatero ruled out the need for a bailout in a radio interview Friday, saying it was "absolutely" clear it would not be required.

But Wattret said it's not fair to lump Spain and Portugal into the same boat.

Spanish finances are in much better shape, and the economy is much more diversified than that of Greece or Portugal, he said.

Meanwhile, Portugal officially announced Friday that it had adopted austerity measures designed to lower government debt and stabilize the countries financial footing. The country was hit by a widespread strike Wednesday in protest of the looming cuts.

While Portuguese government officials claim they will avoid a bailout, most investors remain "skeptical," Wattret said. "Portugal has a bigger problem in the short run and will require assistance."

Irish officials - who are now in the midst of negotiating a rescue package for their own banking industry - also denied the need for funds for weeks, before finally turning to the International Monetary Fund and European Union for help.

Germany and France chime in

German Chancellor Angela Merkel and French President Nicolas Sarkozy said Thursday they were impressed with the austerity plan Ireland has adopted to tackle its massive debt.

Speaking by telephone, the two leaders also agreed that European Union negotiations with the Irish government must come to a "swift conclusion," according to a statement from Merkel's spokesman.

But a working paper produced by Germany's finance ministry and obtained by the Wall Street Journal paints a different picture - one in which eurozone members, private investors and the International Monetary Fund will be forced into a "permanent, intergovernmental crisis-management mechanism."

Investors have long hoped that a strong central Europe, led by Germany, would retain enough firepower to ward off the debt crisis creeping in the EU's extremities. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.28%4.28%
15 yr fixed3.26%3.17%
5/1 ARM3.43%3.51%
30 yr refi4.21%4.17%
15 yr refi3.18%3.10%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,001.22 -38.27 -0.22%
Nasdaq 4,538.55 6.45 0.14%
S&P 500 1,988.40 -3.97 -0.20%
Treasuries 2.40 -0.00 -0.17%
Data as of 7:34pm ET
Company Price Change % Change
Bank of America Corp... 16.13 -0.03 -0.19%
Apple Inc 101.32 0.74 0.74%
Salesforce.com Inc 59.80 4.09 7.34%
General Electric Co 26.15 -0.28 -1.06%
Cisco Systems Inc 24.65 -0.24 -0.96%
Data as of 4:02pm ET

Sections

The Coolest Cooler launched a Kickstarter campaign in July and has raised over $9 million so far, the second highest grossing campaign ever. More

The Coolest Cooler launched a Kickstarter campaign in July and has raised over $9 million so far, the second highest grossing campaign ever. More

This month, Delaware became the first state to pass a law giving heirs the right to access the online accounts and assets of someone who has passed away. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.