European Debt Crisis: Portugal, Greece Dominate Storyline

While both countries, along with Ireland, Italy and Spain, are considered among the weakest, most-indebted European economies, and developments in one nation tend to reflect on the other, Wednesday brought something of a paradox: positive developments in one country were actually seen as the reason negative news was emerging from the other.

Various statements Wednesday seemed to indicate a deal on a second bailout of Greece was close at hand. The sovereign is seeking to negotiate a rescue package with both Eurozone-area governments and holders of the country's debt, wherein the government will receive a €130 billion ($171 billion) rescue package to pay off its current debt obligations. Bondholders, in turn, will accept swapping their former notes for new notes expected to pay in the neighborhood of 20 to 30 cents on the euro.

We are at a crucial point in developments. In the coming days, the agreements must be completed, Greece government spokesman Pantelis Kapsis said Wednesday, according to The Associated Press. Similarly, the organization negotiating on behalf of Greek bondholders said it saw a deal being struck in days ahead.

Greece is facing a March 20 deadline to conclude any deals, as it will then face a €14.5 billion ($19.14 billion) bond redemption event, which would force the country into default.

Unfortunately for Portugal, the closer Greece gets to solving its looming default crisis, the worse it gets for the Iberian nation. The reason: fixed income investors see it as increasingly likely that Portugal will face a similar situation to the one Greece finds itself in, and see the immense haircut holders of Greek bonds are being asked to take as a bad precedent.

The market has taken a view that maybe Portugal could be next to restructure after Greece, Rainer Guntermann, a strategist at Commerzbank, told Reuters

That very market is pummeling Portuguese debt, forcing the government to pay an extraordinarily high yield of 15.5 percent on 10-year bonds Wednesday. That figure was actually down from a record 17.4 percent, an all-time high for euro-denominated government debt, reached Tuesday. Economists consider sovereign yields higher than seven percent unsustainable over the long run.

Portuguese politicians, and even some experts, say the market's driving up Portugese yields reflects an irrational fear of default.

Vítor Gaspar, the Portuguese finance minister, on Wednesday told the Financial Times, We will fulfill our side of the agreement.

Also Wednesday, Paris-based credit rating agency Fitch Ratings agreed with that assessment, saying Portugal did not present the same risk of default as Greece.

The government there is committed and credible. The economy is highly indebted, but they are working on organizing a debt-for-equity swap, David Riley, head of the sovereign-debt unit at Fitch Ratings, said at a conference in New York, according to Bloomberg.