Germany may soften objections to fund increase as bonds drop

Germany may soften its opposition to expanding the region’s 750 billion-euro ($966 billion) rescue facility as Belgium’s political deadlock sent borrowing costs surging and the European Central Bank bought Portuguese bonds.

The cost of insuring against default on European sovereign debt climbed to records and European stocks fell amid concern Portugal is next in line for a bailout. Portuguese securities reversed declines after three traders with knowledge of the deals said the ECB purchased the government’s bonds.

With European governments including Portugal and Spain due to borrow at least $43 billion this week, attention is shifting to whether Europe is doing enough to stem the crisis. For the first time, investors view western European government bonds as riskier than emerging-market debt, the Markit iTraxx SovX Western Europe Index of credit-default swaps showed last week. “Markets won’t stay at these levels because that’s just not sustainable and if they widen much further, then we’ll soon have rescue packages for Spain and Portugal,” Erik Nielsen, chief European economist at Goldman Sachs Group Inc, said in a research note yesterday.

Chancellor Angela Merkel’s chief spokesman, Steffen Seibert, declined to repeat German objections to restocking the rescue fund after the Handelsblatt newspaper reported European Union leaders may discuss the matter in February.

“No decision has been taken about widening the rescue fund,” Seibert said by telephone yesterday. “We should note that only a small part of the available funds has been tapped.”