Eurozone gives investors three more months to sweat

Despite an agreement on funding a future rescue mechanism, the eurozone faces three more months of uncertainty over Portuguese politics, Irish banks and a Finnish election as it struggles to contain a debt crisis. None of these may be show-stoppers for the 17-nation single currency area - the euro has barely moved on the prospect of more delay - but they guarantee investors and EU finance ministers a bumpy ride in the weeks ahead.
This week's European Union summit was meant to draw a line under the 16-month-old crisis by adopting a "comprehensive package" of tougher budget discipline rules, structural economic reforms and strengthened financial backstops. The leaders got well over half way before national politics and the worsening position of Ireland's shattered banks got in the way. What could prevent the delay becoming an own goal is the prevailing bullish market mood which a triple disaster in Japan and turmoil across the Middle East and North Africa has failed to derail.
The fall of Portugal's minority Socialist government after parliament rejected its latest austerity measures increased the likelihood of Lisbon requiring an EU/IMF bailout but pushed back by at least two months the day when it can negotiate one. Portuguese 10-year bond yields jumped to over 8 percent after a pair of ratings agencies cut Lisbon's credit rating by two notches.
Lisbon is believed to have enough cash to meet its 4.3 billion euro debt redemption in April, pointing to June as crunch time. The European Financial Stability Facility has easily enough money to cope with a Portuguese bailout, estimated to require 60-80 billion euros over three years.
But despite the commitment of all the main political parties to respect Portugal's deficit-cutting targets, markets may become more nervous if there are further ratings downgrades or the prospect of an indecisive election outcome. Spain appears to have done enough in terms of budget consolidation, labour and pension reforms and bank restructuring to avoid being dragged down by instability in Portugal, hence the initial calm market reaction.
If that holds, EU finance ministers may have grounds to conclude that they have successfully contained the debt crisis to three peripheral countries - Greece, Ireland and Portugal. Spanish Prime Minister Jose Luis Rodriguez Zapatero said on Friday he will take new measures to strengthen the economy as Spain continues to fight off market concerns over its debts.
"Spain is being well-funded by investors and is managing its economy and communications with the market much better," said Gary Jenkins, head of fixed income at Evolution Securities. "It's in good shape but I would have said exactly the same things about Ireland 12 months ago."
Ireland's deepening banking woes may present a more immediate cause for anxiety. New Prime Minister Enda Kenny put off an attempt to renegotiate the terms of last November's 85 billion euro Irish bailout until he receives final results of stress tests on the banks next Thursday, tests likely to show a bigger funding hole. Euro zone officials expect Ireland will need more money from the EFSF to shore up its banks, raising pressure on Kenny to make concessions to France and Germany on a common European corporate tax base, despite domestic opposition.