Portugal gets little respite after Irish bailout

By Barry Hatton

Associated Press

Published: Monday, Nov. 29 2010 10:25 a.m. MST

LISBON, Portugal — Portugal's high debt burden remained a concern for the eurozone and financial markets on Monday, a day after European Union countries endorsed a plan to help Ireland with its ailing finances.

Officials in the 16 nations using the euro currency had hoped Sunday's agreement to give €67.5 billion ($89.4 billion) in loans to Dublin would check the spread of investor jitters to other fiscally vulnerable members of the bloc, especially Portugal and Spain.

Portugal is regarded as the next weakest link after Ireland because of its high debt load and weak growth. It has been a target for market concern since Greece's bailout in May.

Trouble in Portugal also could affect neighboring Spain, where low growth and high unemployment are shackling the economy.

The yield on Portuguese 10-year bonds fell slightly to just below 7 percent in early trading, but the respite was brief and by mid-afternoon the yield had once again breached that mark to stand at 7.036.

Ireland's was up to 9.3 percent, while Spain's yield edged higher to 5.4 percent, continuing its recent upward trend. By contrast, Germany's 10-year bond yield — a benchmark of lending safety — was stable at only 2.7 percent.

UniCredit Research said in a note Monday that despite Ireland's rescue "the risk remains that the euro area comes under continued pressure to provide a package for Portugal at least."

Portuguese stocks also felt the heat, with the benchmark index falling 2.19 percent to its lowest close in more than two months. Spain's index dropped 2.33 percent after shedding 7 percent over last week.

Despite the market volatility, a Spanish central bank official on Monday dismissed the possibility that his country will need a bailout, saying Ireland and Greece can not be compared to Spain.

Bank studies services director Jose Luis Malo de Molina said the Spanish "financial system is essentially sound" and that the Spanish economy's problems would not be fixed by external financial aid.

Portugal's government has likewise repeatedly said it does not want or need financial assistance, though soaring borrowing costs could change that.

It says its 2011 austerity program, approved last week by Parliament, will bring its debt back under control through tax hikes and pay and welfare cuts.

Portugal has not had to contend with a banking crisis or a burst property bubble.

Prime Minister Jose Socrates says his country is already showing signs of recovery, with a rise in exports of around 17 percent through September and a current growth rate of 1.8 percent.

The austerity plan may stunt growth next year, however.

In an interview published Monday, economist Nouriel Roubini said Portugal should consider asking for a bailout now, before its financial plight worsens.

Roubini, a professor of economics at New York University who had predicted the financial crisis, told daily paper Diario Economico it is "increasingly likely" Portugal will require international assistance.

He was quoted as saying there are ample funds to shore up Portugal, one of the eurozone's smaller countries which contributes less than 2 percent to the 16-nation bloc's gross domestic product. Roubini said Portugal is approaching "a critical point."

But, he said, Spain, Europe's fourth-largest economy, is "too big to bail out."

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