Angela Merkel: “We will do what is necessary, everything else will be discussed step by step”

Eastern promises aside – and isn’t there something about beware [metaphorical] Greeks bearing gifts? – Portugal’s visit to those reluctant bond markets is described as “successful” by this Reuters report at the Irish Times –  €1.25 billion raised with the ten year yield kept below 7%.

But as the BBC report points out

Bond buying by the European Central Bank (ECB) had helped keep the yield below 7%.

“Probably the most important thing for the 10-year yield is that the 7% level was not breached,” said Michael Leister, of West LB in Duesseldorf.

“The ECB have been very active in past days stabilising the market and sentiment.

“It remains to be seen over the coming trading session whether this will be a turnabout for Portugal and whether recent spread tightening can be sustained.”

And on her Stephanomics blog, the BBC’s Stephanie Flanders warns

But even with this auction, most now consider it a question of when, not if, Lisbon will join the list of eurozone governments turning to Europe and the IMF for emergency support.

Today’s much anticipated auction will come as a relief. But Portugal’s government needs to borrow around 20bn euros from the markets this year – a big chunk of it in the first few months. It is not plausible to anyone that they will finance that debt at an interest rate even close to 7%.

As Stephanie Flanders goes on to say

Portugal’s problem is that whatever issues it has with its banks and its public borrowing are being greatly magnified by the country’s weak prospects for growth.

The consensus forecast is for the Portuguese economy to shrink slightly in 2011, after very meagre growth in 2010. By contrast, Germany is expected to grow by at least 2.5% in 2011, after growth of around 3.6% in 2010.

If the Portuguese had that kind of recovery to look forward to, the world would have been a lot less interested in the results of today’s auction. And investors would not be placing their bets now on a pre-emptive show of support for Portugal’s much larger neighbour, Spain.

It would be easier for everyone if Portugal looked just like Greece – or Ireland. But it doesn’t. Arguably, it has more in common with other countries on Europe’s periphery that are being held back by a lack of confidence in future growth. If the markets are right, a Lisbon bailout is a matter of time. But after Portugal, it becomes more difficult to draw a line in the sand.

BBC Europe editor Gavin Hewitt adds

One indication that the eurozone still expects further bail-outs came in comments from Olli Rehn, the EU’s top monetary official. Referring to the main rescue facility, he said it might need to be “reinforced and the scope of its activities widened”.

There was a similar line from the President of the European Commission, Jose Manuel Barroso. He urged member states to increase the size of the crisis fund, saying “it is perfectly possible to take these decisions no later than at the next European Council in February.” The urgency, of course, has its roots in the fear that if a large country like Spain got into difficulty the existing fund may not be big enough to support it.

The German government quickly said that such actions made no sense at the moment. The French too are mindful of their voters and taxpayers. They believe the current 440bn euros in the fund are sufficient for the time being.

The German Chancellor, Angela Merkel, said today “the volume (of the fund) is far from being exhausted”. “We will do what is necessary,” she went on, “everything else will be discussed step by step”.

History won’t keep knocking forever, Frau Bundeskanzerlin…