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Portugal, Spain hit by investor fears over debt

By Barry Hatton

Associated Press

Published: Wednesday, Nov. 24 2010 4:35 a.m. MST

LISBON, Portugal — Portuguese and Spanish borrowing costs rose sharply Wednesday as investors worried that their debt levels will prove unsustainable, putting them next in line for a European bailout.

As a major public sector strike in Portugal further undermined market confidence there, the interest rate on the government's 10-year bonds broke through the 7 percent barrier in morning trading. The 10-year Spanish bonds rose to 5.08 percent at mid-morning from 4.91 percent at the start of trading.

While both countries are not at any immediate risk of bankruptcy, those rates are making their already heavy debt loads more expensive to finance. The higher cost to roll over debt is eating away at any progress the governments make in their public finances through austerity measures.

The yields have been moving higher since Ireland accepted an EU-IMF bailout this week because investors demand a higher return for lending to countries with shaky finances.

The market tensions pushed Lisbon's benchmark stock index, which has witnessed steep drops all week, down another 0.4 percent in early trading before recovering to gain 0.6 percent. Spain's main index fell 1.1 percent after opening but was flat by late morning.

Portugal and Spain are viewed as the 16-nation eurozone's next weakest links now that Ireland has followed Greece and accepted a massive international rescue.

Portugal accounts for less than 2 percent of the eurozone's total economy but a potential bailout for Lisbon would add to the pressure on Spain, the European Union's fourth-largest economy, and entail possibly dramatic repercussions for the entire bloc.

The euro dropped to a two-month low against the U.S. dollar on Wednesday on concerns about the bloc's financial health.

Portugal's minority government has repeatedly insisted it doesn't need financial assistance because its austerity plan will drive down the country's debt burden.

But Eurasia Group, a New York-based research and consulting company, said in a report Wednesday that European officials don't expect the eurozone's problems to stop at Ireland and that a rescue plan for Portugal could be unveiled by early next year, when it is due to resume government bond sales.

"There is a strong presumption that a package will be necessary for Portugal and the related planning is underway," Eurasia Group said. "Portugal will be pressed hard to accept a package even if the Portuguese government claims the country does not need it."

Analysts have estimated Portugal will need at least €50 billion ($67 billion).

Spanish Finance Minister Elena Salgado also insisted Wednesday that Spain has no need whatsoever for a bailout like Greece and Ireland. She said in a radio interview that the Bank of Spain's strict rules for the country's banks have ensured the Spanish financial system is healthy.

Though they insist their banking systems are in good order, the Iberian neighbors face similar challenges in reducing debt amid meager growth.

Spain is struggling to emerge from nearly two years of recession, and unemployment is at a eurozone high of 19.8 percent.

Portugal has borrowed huge amounts to finance welfare entitlements and private consumption. At the same time it has protected jobs through outdated labor laws that make it difficult to hire and fire workers while industry has broadly failed to modernize and is chronically uncompetitive.

Portugal's austerity package, due to be introduced Jan. 1, cuts the pay of public employees by an average 5 percent, trims welfare benefits and hikes income tax and sales tax. The measures, including a reduction in state investment, are forecast to stifle already weak economic growth after a recession last year.

The scale of public resistance to the belt-tightening surfaced in a daylong strike that partially paralyzed public services, including transit systems.

Media reports from around the country said schools canceled classes, many government offices stayed closed and municipal services such as trash collection were canceled.

Luis Moreira, a 51-year-old Lisbon commuter, was among those who got up early to catch one of the few suburban trains that were running.

"I think the (strike) makes sense. People have to fight for their rights, people have to fight against what is happening," he told Associated Press Television News. "We are lucky that for the time being this is a strike not a violent fight."

No major protests were scheduled. Figures on turnout were due later in the day.

Unions described their action as a general strike but banks, shops, cafes and almost all private companies were open.

____

Clendenning reported from Madrid.

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