A deceptive calm

25 Mar 2011 By Neil Unmack Follow @unmack1

Madrid has been isolated from the punishment bond investors are inflicting on Portugal. The hope is that Spain is out of the woods. Yet it is vulnerable to a weak banking system and unruly regions. Rising Portuguese yields should be a reminder this is no time for complacency.

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Portugal's Prime Minister Jose Socrates resigned on March 23 after failing to win parliamentary support for austerity measures. Discussions this month to increase the euro zone's bailout mechanism, the European Financial Stability Facility, could be derailed by the rising popularity of Finland's antieuro True Finns party and parliamentary elections in Finland next month.

Portuguese credit default swaps have risen 65 basis points since the start of March to 529 bp on March 24. In the same period default swaps on Spanish debt have narrowed 25 bp to 223 bp, according to Markit data. The euro traded at $1.4033 on March 25, up from $1.3668 at the start of March.

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