Portugal, Spain hit by investor fears over debt

By Barry Hatton

Associated Press

Published: Wednesday, Nov. 24 2010 10:05 a.m. MST

LISBON, Portugal — Portuguese and Spanish borrowing costs rose to near record highs Wednesday as investors worried that the governments' debt loads will prove unsustainable, putting them next in line for a European bailout, and as a public sector strike hit Portugal.

The interest rate on Portugal's 10-year bonds reached 7 percent, equaling a euro-era record. The equivalent Spanish bond yield rose to 5 percent at mid-morning from 4.91 percent at the start of trading. By contrast, 10-year yields for Germany — considered the benchmark — were only 2.7 percent.

The bond 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.

Neither Iberian country is at immediate risk of bankruptcy as Portugal has no major bond sale before January and the borrowing rate for Spain, which has two auctions before the new year, is still manageable. But the rates make already heavy debt loads more expensive to finance.

The higher cost to roll over even short-term debt has been eating away at any progress the governments make in their public finances through austerity measures. That was illustrated in Portugal's latest public spending figures, in which higher loan interest costs more than offset a rise in public revenues. Consequently, spending through October was up 2.8 percent.

Buoyed by a late rise in global stock markets, Lisbon's benchmark stock index closed 0.6 percent higher Wednesday, and Spain's ended 0.3 percent up. Neither exchange, however, came close to recovering the steep losses recorded in the previous two days.

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.

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