In a sign of how much fear is swirling in Europe, bank stocks erupted in celebration after Portugal failed to blow up.
Shares of big Spanish banks surged 10% and lenders in Germany, the Netherlands and the U.K. rose 5% after Portugal sold 1.25 billion euros ($1.63 billion) of bonds in its latest effort to fend off a market panic.
The bond sale prompted Portuguese officials to say for the latest time that they won’t need a bailout. If true, that is good for banks such as Santander (STD) and Banco Bilbao (BBVA) of Spain, whose funding costs might be expected to go through the ceiling should Portugal falter and the market turn its baleful glare on Spain, which is widely viewed as the next most vulnerable European economy.
The rally comes after shares of the big euro banks tumbled near their 52-week lows. One measure of credit stress matched its 2009 high this week, as bets against stressed European states and their banks multiplied. U.S. banks have been acting less harried but joined in the rally nonetheless, with JPMorgan Chase (JPM) and its peers up 2%.
But the good news in Europe is likely to be short lived. One bond sale certainly won’t bring Portugal out of the woods, given the country’s faltering economy, shaky politics and yawning financial needs, and there is no sign policymakers are making much progress on a broader solution.
“The auction might have bought Portugal some time but it won’t divert attention away from its low growth prospects, which will make it even harder to reduce its deficit,” credit analyst Gavan Nolan of market data firm Markit wrote in his daily market update.
Among those not impressed was Pimco’s Bill Gross, who said on Bloomberg television that the auction – in which the government sold 10-year bonds at a yield of 6.71%, below the 7% or so that has recently prevailed in a panicky market – was a failure in all but name.
“To me that is not a successful yield,” said Gross, who said he isn’t buying the bonds of Portugal nor of the other European peripheral countries, known as the PIGS for Portugal, Ireland, Greece and Spain.
“It speaks in the long term to Portugal not being able to service its debt simply because its primary deficit is increasing based upon those high yields,” he added, referring to the difference between government income and spending, excluding interest payments. “Something has to be done.”
A Portuguese bailout is widely expected, perhaps within the month. “A presidential election will be held on 23 January, and a bailout would have a major impact on the campaigning if it came before the vote,” writes Eurasia Group analyst Antonio Barroso.
But Gross and others are talking about much bigger changes, such as an expansion of the European bailout facility or changes in how the European Union functions altogether. Those will take time, though, and for now Gross says of the PIGS, “we would not invest in them at the moment.”
