Pressure on Portugal heightens amid bailout fears

[January 10, 2011]  LISBON, Portugal (AP) -- Europe's debt crisis looked increasingly likely to claim another victim on Monday, as Portugal's borrowing rates spiked to euro-era highs amid reports Germany and France are pushing it to accept outside help and prevent contagion to other countries.

The yield on Portuguese 10-year bonds -- a key gauge of investor sentiment - rose for a fourth straight day, hitting a potentially unsustainable 7.16 percent at one stage. By early afternoon, the yield had dropped back modestly to 7.05 percent.

The spike higher follows a report in German newspaper 'Der Spiegel' that France and Germany are both pressing Portugal to tap a European rescue fund to keep the crisis from spreading to much-bigger Spain.

"Germany is not pressuring anyone, and has not pressured anyone in the past," German government spokesman Christoph Steegmans said. The French government declined to comment.

Even though Portugal denies it needs a rescue, analysts said there are distinct echoes of what went on with Ireland just a couple of months back.

Before Ireland was forced to accept a rescue from its partners in the European Union and the International Monetary Fund, there were numerous reports suggesting that Germany, in particular, was pressuring Dublin to take the funds to stop the crisis spreading. The Irish government also insisted it didn't need any help before eventually accepting a euro67.5 billion bailout.

"First we have the speculation that Portugal is being pressured into taking funds in order to save the crisis from spreading to Spain," said Derek Halpenny, an analyst at the Bank of Tokyo-Mitsubishi UFJ. "Then we get the denials from Portugal."

The prevailing view in the markets is that Europe may be able to support Portugal but that a bailout of Spain would test the limits of the existing bailout fund, potentially putting the euro project itself in jeopardy if governments don't put up more cash.

Spain accounts for around 10 percent of the eurozone economy, compared with Greece, Ireland and Portugal, which account for only around 2 percent each.

Analysts estimate Portugal, which has been dogged by low growth and rising debt levels, would need international assistance of between euro50-euro100 billion.

Markets have brushed off the Portuguese government's repeated claims over the past year that it doesn't need financial help. The minority government has introduced an austerity program of tax hikes and pay cuts it says will restore fiscal health.

The key to whether Portugal gets a bailout sooner rather than later could come Wednesday, when the government aims to raise euro1.25 billion by auctioning off 3-year and 9-year bonds. Portugal needs to ask investors to lend it euro20 billion this year to finance public accounts.

If it doesn't get enough investor backing or there's a consequent impact on Thursday's debt offerings from Spain and Italy, then analysts reckon a bailout could be imminent. All eyes would then turn to next week's meeting of eurozone finance ministers in Brussels.

"Perhaps more interesting is the market's attitude to Spanish and Italian paper on Thursday; this will be a truer test of whether or not contagion is getting a grip," said Jane Foley, an analyst at Rabobank International.

Spanish Economy Minister Elena Salgado lent Portuguese authorities support Monday, saying Portugal won't need a bailout because it is enacting reforms that will help save the nation's economy from imploding.

"Portugal will not need any outside help," Salgado said in an interview with Spain's Cadena Ser radio. "I think Portugal will not have to resort to any plan because it is fulfilling its commitments."

She added that Portugal "has structural weaknesses, but will make the corresponding reforms." Salgado also reiterated that Spain will enact pension reform that will push the retirement age to 67 from 65, and is negotiating with unions to convince them not to hold a general strike later this month in protest of the move.

[Associated Press; By BARRY HATTON and PAN PYLAS]

Pylas contributed from London. Alan Clendenning in Madrid also contributed to this report.

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