Rising bond yield sounds alarm for Portugal

[February 10, 2011]  LISBON, Portugal (AP) -- Uncertainty over Portugal's financial future grew again on Thursday, when its borrowing rates hit new euro-era records, signaling the government and fellow European leaders have been unable to check the spread of the debt crisis.

The rise in Portugal's 10-year bond yield came as investors were disappointed with the slow pace of progress in an EU plan to coordinate measures to ease a crisis that is more than a year old. Government leaders came up with no concrete plan at a summit last week, delaying final decisions to a March 11 meeting in Brussels.

France and Germany are pushing other governments to boost growth by improving their competitiveness. Though no concrete measures have been proposed, documents circulated last week suggested they could include boosting retirement ages, getting rid of automatic inflation-linked wage increases and including constitutional limits on debt.

In the absence of a comprehensive eurozone debt strategy, investors continue to fret about whether Portugal could follow Greece and Ireland in taking a bailout.

Portugal needs to raise up to euro20 billion on financial markets this year and faces two crunches: in April, when it has to meet a euro4.5 billion bond repayment, and in June when it has to find almost euro5 billion. Debt sales this year have drawn storng investor demand.

Though Portugal is one of the eurozone's smaller economies, its fiscal collapse could add to pressure on neighboring Spain, one of the continent's biggest economies.

Portugal is struggling with the legacy of a decade of anemic growth during which the country racked up heavy debt.

Its borrowing costs began to rise almost a year ago as investors identified its frail finances. The 10-year bond yield -- seen as an indicator of market sentiment -- surged again last week amid signs that France and Germany had different ideas about how to deal with the crisis.

The 10-year interest rate on Portuguese bonds hit 7.6 percent on the secondary market Thursday -- not far off the level that forced Dublin to accept aid. The tensions were localized, however, with Spain's 10-year bond yield down slightly at 5.2 percent.

Germany's benchmark 10-year bonds also were slightly lower at 3.2 percent Thursday.

Portugal's minority government insists it can restore fiscal health without help, but its borrowing costs could become unsustainable.

The government has introduced tax hikes and pay cuts to reduce debt and says tax revenue was up 15 percent in January. But the measures could cast Portugal into recession and worsen its plight.

The austerity policy has also added to political pressure on the government. The governing Socialist Party's candidate in last month's presidential election suffered a heavy defeat, and a recent wave of strikes continued Thursday with partial stoppages by rail staff and postal workers.

[Associated Press; By BARRY HATTON]

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.