Portugal fights rising fires of crisis

11th January 2011, Comments 0 comments

Portugal fought with rising urgency on Tuesday to avert a debt rescue, denying rumours that help was in the offing and trying to paper over a damaging split at its central bank.

Days of speculation that Portugal is under pressure to accept help have raised alarm that the eurozone may be lurching into a new phase of crisis, while government-less Belgium also saw a surge in the amount it must pay to borrow money.

Portugal, widely seen at risk of being the next eurozone country to need rescuing after Greece and Ireland, intends to make a critical issue of debt on Wednesday and has seen rates it has to pay rise sharply.

Analysts described "a deep sense of deja-vu" and said the government was trying to "delay the inevitable."

The beleaguered country suffered a fresh blow when the central bank said it would suffer a 1.3-percent recession this year, downgrading a previous outlook of zero growth.

"All the rumours on the IMF and on external assistance are speculation which does not help, which harms the interests of the country and aggravates market conditions," Prime Minister Jose Socrates said.

Socrates said that Portugal's public deficit for 2010 was "clearly less than the forecast" of 7.3 percent of output and might even be down by an extra 0.5 percentage points.

Finance Minister Fernando Teixeira dos Santos had said earlier that Portugal did not intend to seek external help and "would do everything to avert such an eventuality."

EU diplomats say Portugal has come under heavy pressure from several European countries to accept outside help so as to avert crisis and limit the impact on other countries after Greece and Ireland had to be bailed out last year.

"Portugal is doing its work to solve its fiscal imbalances, it is Europe which seems not to be doing its work in maintaining the stability of the euro," Teixeira dos Santos said.

The ministers spoke after a split emerged at the central bank overnight over whether Portugal would require outside help.

Carlos Costa, the governor of the Bank of Portugal, rejected suggestions that the country would require financial aid.

"I have said it and I will say it again: the Portuguese are solving their problems and have the ability to solve their problems themselves," he told reporters.

But shortly afterwards, an administrator at the Bank, economist Teodora Cardoso, took a different line, saying that a bailout by the International Monetary Fund or the European Stabilisation Fund was "probable".

Portugal would be helped in regaining market confidence "if we have external aid", she said.

In another sign of rising tension over pressure from financial markets on Portugal over its deficit and debt problems, a leading contender in Portugal's January 23 presidential election said that campaigning should be suspended so that President Anibal Cavaco Silva could focus on the crisis.

Silva, who is favourite to win the election, refused to comment on the prospects of a bailout when questioned on Portuguese television late Monday.

The auction of debt on Wednesday marks Portugal's first foray into the bond markets this year, with the expected sale of 750 million to 1.25 billion euros' ($967 million-1.6 billion) worth of long-term debt.

The rate or yield on benchmark 10-year bonds closed at 7.016 percent on Monday, after record high levels of 7.193 percent on Friday, amid comment from analysts that the European Central Bank had entered the market in a bid to "stop the rot."

In the case of Greece, rates above 7.0 percent began to become prohibitive and were an extra factor making the country the first eurozone member to be rescued by the EU and International Monetary Fund.

An EU diplomat told AFP that several European countries were piling pressure on Portugal to seek help, amid concern that the eurozone debt crisis might spread to Spain, a far larger economy.

Spanish Prime Minister Jose Luis Rodriguez Zapatero said Tuesday the country would "without a doubt" meet its public deficit target of 6.0 percent of GDP in 2011, and "comfortably" meet its target of 9.3 percent for 2010.

The European Commission, France and Germany denied that Lisbon was being strong-armed.

European officials also issued denials of pending aid late last year before Ireland ultimately succumbed to pressure to accept a 67-billion-euro bailout from the European Union and IMF and the situation was similarly confused before Greece asked for help in May.

Attention also focused on Belgium, which on Tuesday marked 212 days without a government.

The spread, or difference, between the interest rates demanded by investors to buy Belgian bonds and the benchmark German bund reached 148.2 basis points at around 1015 GMT.

This means Belgium would have to pay nearly 1.5 percentage points more than Germany to borrow money on the market.

The yield, or rate, on Belgian 10-year bonds rose to 4.287 percent from 4.218 late on Monday, under the historic high level of 5.010 percent reached in July 2008.

© 2011 AFP

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