LUXEMBOURG/PORTUGAL: A senior European Central Bank official sent a strong signal on Monday that interest rates would rise next month, as finance ministers met to hammer out details of a new anti-crisis package for the euro zone.
Portugal may come under fresh pressure to seek a bailout like Greece and Ireland this week if its minority government, which was preparing to send new austerity measures to parliament, fails to get them passed.
Despite that risk, investors have pushed up the bonds of countries on Europe's vulnerable southern periphery in recent days, confident that EU leaders will sign off on a broad range of measures at a two-day summit starting on Thursday that will help prevent their debt crisis from spreading beyond Portugal.
The risk premium markets demand to hold Spanish 10-year debt instead of German benchmarks is at its lowest level since early February, and the euro is hovering above $1.41 for the first time in over four months.
"Whereas small Portugal is trundling towards a likely bail-out more slowly than projected, much bigger Spain has moved a little away from the brink," said Holger Schmieding, chief economist at Berenberg Bank.
Still, the longer-term risks to the single currency bloc remain high.
Ireland is resisting pressure from its euro zone partners to harmonise corporate tax rules in exchange for better terms on its 85 billion euro ($121 billion) rescue, and many economists are sceptical that Dublin and Athens can avoid a restructuring of their debt in the longer-term.
The solidity of Europe's banks remains a concern, and regulators are still haggling over how tough capital requirements should be in a second round of stress tests that began earlier this month.
Added to that is the threat of higher interest rates, as the ECB looks set to follow through on its threat to tighten monetary policy next month to counter rising inflation risks despite uncertainty generated by the nuclear crisis in Japan.
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