EU eyes easing lending, Portugal resists bailout

European finance ministers will discuss increasing the effective lending capacity of their financial rescue fund next week, EU sources said on Tuesday, as Portugal defied pressure to seek a bailout. Japan, following in the footsteps of China, promised to buy eurozone bonds this month in a show of support for the single currency area's struggle to overcome a seething debt crisis that helped steady the euro.
-- Japan to buy eurozone bonds using euros from FX reserves
-- Chinese central bank adviser urges caution in bond buying
But a respected former European Central Bank official, Otmar Issing of Germany, warned that failure to use the crisis to enforce Europe's budget rules more strictly could lead to the eventual break-up of economic and monetary union.
Euro zone sources said ministers would consider next Monday ways to enable the European Financial Stability Facility (EFSF) to lend its full nominal value of 440 billion euros, instead of roughly 250 billion at present, to cope with any future rescues. "This increase of the capacity of the EFSF is something that will definitely be on the table next week," one source said. Germany and France, the euro area's two biggest economies, have so far said no increase was necessary since only a fraction of the money has been lent to Ireland.
Portugal, the latest eurozone member in the market's firing line, continued to fend off market and peer pressure to seek an EU-IMF bailout. Prime Minister Jose Socrates said his country had beaten its goal for reducing the 2010 budget deficit and did not need outside help.
Lisbon faces a crucial test on Wednesday of its ability to fund itself on the market at affordable rates after Greece, the first country to be rescued last May, cleared its first funding hurdle of 2011, selling six-month money at just under the rate of its bailout loans. "The Portuguese government and Portugal will not ask for any aid or financial assistance for the simple reason that it is not necessary," Socrates told a hastily convened news conference.
But a Portuguese central bank board member, Teodora Cardoso, broke ranks with political leaders, saying Lisbon would do better to seek international financing. The Bank of Portugal forecast the economy would shrink by 1.3 percent this year, contradicting government forecasts, and said Portuguese banks would continue to rely on European Central Bank for liquidity this year and next due to problems accessing the interbank market.
Yields on Portuguese 10-year bonds edged down slightly but remained above 7 percent, a level widely seen as unsustainable, after traders said the European Central Bank stepped in to buy government bonds for a second straight day. Japanese Finance Minister Yoshihiko Noda said Tokyo was considering using its euro reserves to buy about 20 percent of the AAA-rated bonds to be jointly issued by the eurozone to raise funds to support the region's second bailout recipient Ireland.
Japan's offer comes days after China renewed its commitment to buy Spanish debt and analysts said it reflected both Tokyo's concern about the impact of the crisis on its export-reliant economy and an effort to reassert itself on the global stage. A senior adviser to China's central bank said in a Reuters interview that Beijing too should be buying safe, jointly guaranteed euro zone debt rather than riskier bonds issued by troubled member states such as Spain and Portugal.
Unofficial estimates described by a senior EU official as credible suggest China holds more than seven percent of the 8.8 trillion euros in outstanding euro zone public debt, mostly through its State Administration of Foreign Exchange (SAFE) and sovereign wealth funds.
Issing, who served as the ECB's first chief economist from 1998 to 2006 and remains influential in Germany, said bad fiscal policies were leading inexorably to fiscal transfers from solid member states to weaker ones that would arouse political anger.
In Belgium, which has also come into the market focus because of its high debts and inability to form a government since last June, caretaker Prime Minister Yves Leterme was preparing further budget cuts designed to calm investors at the request of King Albert.