Portugal gets its bailout; Greece remains the bigger worry

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Europe’s government debt crisis eased a bit Monday as euro-zone finance ministers approved a $111-billion bailout for Portugal.

The deal, as expected, will provide the struggling country with loans over three years from European Union funds and from the International Monetary Fund.

The rescue by the EU -- the third bailout of a member state in the last year, following aid packages for Greece and Ireland -- was necessitated by Portugal’s soaring cost of borrowing in the private market. Investors, fearing the country might end up defaulting on its debt, have been demanding double-digit interest rates on Portugal’s bonds, effectively pricing the country out of the market.

Rates fell sharply Monday as the bailout deal neared completion. The market yield on two-year Portuguese government bonds (charted at left) slid to 10.62% from 11.29% on Friday. The yield peaked at 12.10% a week ago.

As part of the agreement with the EU and IMF, Portugal will ask its private bond holders to hold on to what they own, though their cooperation would be voluntary. The country, already back in recession, also will face more austerity measures.

Some analysts raised concerns over the weekend about how European debt and currency markets would react to the arrest on Saturday of IMF chief Dominique Strauss-Kahn, who has been charged with sexual assault of a hotel maid in New York. But investors seemed unmoved by the news.

The euro currency edged up against the dollar after slumping for the last two weeks. The euro was at $1.417, up from $1.410 on Friday.

Meanwhile, Greece remains Europe’s biggest financial worry at the moment. The country is expected this week to ask the EU for more financial help.

Many investors, including Pimco bond guru Bill Gross, believe it’s only a matter of time before Greece defaults on its crushing debt.

German Chancellor Angela Merkel said Monday that she was opposed to any debt restructuring by euro-zone countries before 2013 because of the threat that would pose to the euro zone’s ‘credibility.’ But an EU executive sought to make a distinction between a restructuring and a “reprofiling” of debt.

The yield on two-year Greek bonds was up fractionally from Friday, at 24.91%.

By contrast, the U.S. Treasury pays 0.52% on its two-year debt; Germany pays 1.81%.

-- Tom Petruno

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