Euro falls as debt worries resurface

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Europe's debt problems have made a New Year resurgence with the euro falling to near a three-month low against the greenback on speculation European nations will struggle to raise funds.

Europe's currency yesterday declined against 13 of its 16 major counterparts before Portugal, Spain and Italy sell government debt this week.

Speculation has also mounted that France and Germany are putting pressure on Portugal to accept a multi-billion euro bail-out from the European Union and International Monetary Fund.

Westpac senior market strategist Imre Speizer said the euro had broken down significantly since the start of the year passing through US$1.30 - a figure seen as a milestone for the currency.

Speizer said the fall was a sign of the renewed spotlight on Europe and its debt problems, which were likely to be the biggest negative on the horizon this year. "The market has focused on this week with it being a big issuance week."

The Governments of Portugal, Spain and Italy all need to issue large amounts of debt this week.

Portugal will sell 2014 and 2020 bonds tomorrow. Italy will offer 2014 bonds and Spain will auction 2016 debt on Thursday, according to data compiled by Bloomberg.

Speizer said there were question marks over whether Portugal would be able to get its debt raising away and if it couldn't whether it may need to tap emergency funds.

German newspaper Der Spiegel reported last week that experts in the French and German Governments believed the southern European country would not be able to raise money on capital markets for much longer.

But the German finance ministry said yesterday that Germany wasn't pressing Portugal to tap the euro area's rescue fund.

"We aren't putting any pressure on Portugal," Berlin-based ministry spokesman Tobias Romeis said.

The Portuguese Government has also denied that it required international help or that it was under pressure from France and Germany to accept a bail-out.

Ireland was forced to accept similar financial help last year after several weeks of resisting pressure from fellow EU members.

International investors are concerned about Portugal's debts and the EU is worried that the crisis may soon spread to Spain.

Sources have suggested the bailout could total €80 billion ($136 billion), with Britain forced to accept a liability for a small portion of the money.

Portugal is viewed by many economists as the peripheral euro zone country most likely to follow Ireland and Greece as it grapples to cut its debts and borrowing costs.

A Reuters poll of economists last week showed almost all expected Portugal to need a bail-out.

"Portugal has not requested it - you cannot force somebody to want something," a second senior euro zone source said.

"Strictly, arithmetically speaking, it would not be necessary, but given the hysterics of some market participants it may become useful."

The growing pressure on Lisbon follows a sharp rise in Portuguese 10-year bond yields at the end of last week to euro lifetime highs above 7 per cent, as investors worried about the prospect of up to €1.25 billion of bond supply it will offer at an auction on Wednesday.

Speizer said the weakness in the euro had strengthened the Kiwi dollar cross with it surging to the highest point since December 2005.

The move is bad news for Kiwi exporters who sell into Europe but good news for importers of European goods into New Zealand.

The kiwi broke through the €58c barrier last month and had continued to climb. Yesterday, it was trading around €59c.

The highest the kiwi has ever traded against the euro is €61.2c but Speizer said it could break through that this year.

While the kiwi dollar was seen as a riskier currency the European situation was dragging the euro down even more.

DOMINO EFFECT

* Greece and Ireland have already accepted bail-outs.

* Portugal is said to be under pressure to accept a bail-out, too.

* A bail-out of Portugal could total €80 billion