Spain insisted on Thursday it would not follow neighbouring Portugal in requesting a financial bailout as European Union finance ministers gathered to decide how to contain the eurozone debt crisis.
Having resisted pressure from the markets as well as European partners for months, outgoing Portuguese Prime Minister Jose Socrates announced in a televised address late Wednesday that he had requested aid after parliament rejected his new austerity programme.
“I am firmly convinced that that is going to be further aggravated if nothing is done,” said Socrates, who resigned on March 23 after parliament’s rejection, opening the way for new elections set for June 5.
The move became all but inevitable as the markets piled the pressure on Portugal, demanding ever higher rates of return to invest in new government debt instruments.
Analysts suggested 55 billion euros would be needed to cover sovereign debt and another 10 billion to recapitalise Portugal’s banks.
Earlier Wednesday, Portugal had to pay sky-high interest rates on its latest bond sale while insisting it would meet upcoming debt repayments and that it was not in talks on securing a bridging loan to tide it over to June 5 polls.
The reaction on the Lisbon stock market was positive, with the main stock market index, was up 1.50 percent in early trading.
But analysts warned that the debt-laden country’s woes were far from over as speculation about the fate of Spain — the EU’s fourth largest economy — heightened.
“After being beaten up in Wednesday’s debt auction, Lisbon has waved the white flag,” said the Financial Times.
“In any event, an EFSF (European Financial Stability Fund) rescue will not solve Portugal’s more deep-seated problems, namely its feeble growth and lack of competitiveness.”
Analysts have said that Portugal could require a package worth 70 billion euros (100 billion dollars), compared with 85 billion for Ireland and 110 billion for Greece.
Portugal must repay some 4.2 billion euros of debt by April 15 and another 4.9 billion euros by June 15.
The pressures on Portugal had raised doubts about weaker eurozone members, such as Spain. Greece and Ireland have already agreed bailouts but only in exchange for dramatic spending cuts.
But the Madrid government on Thursday sought to distance itself from Portugal’s request for financial assistance from the European Union, insisting it was not at risk of seeking a similar bailout of its battered economy.
“Spain is not at risk at all after Portugal has asked for a rescue,” Finance Minister Elena Salgado told Spanish National Radio (RNE).
She emphasized that the Spanish economy was “distinct” from Portugal’s as it is “larger, more diversified and more productive.”
Also, the Spanish government’s economic reforms are “deeper” and carried out “at a faster pace” than in Lisbon.
In another interview Thursday, with the private radio station Cadena Ser, Salgado said the government “absolutely rules out any possible contagion” of Spain from Portugal.
Christoph Weil, an analyst with Commerzbank, said that attention would now inevitably focus on Spain.
“While we believe chances are good that the country will not need external help, but there is no guarantee,” he said.
The International Monetary Fund has already said it stands ready to assist Portugal and Lisbon’s request will top the agenda as finance ministers gather in the Hungarian capital Budapest for talks.
Significantly, Germany, the eurozone’s paymaster, said Lisbon would only be able to approach the EFSF for help, ruling out any effort to arrange a bridging loan.
The EFSF was set up last year after fellow struggling eurozone member Greece had to be bailed out by the EU and International Monetary Fund and was used to mount a similar rescue for Ireland in November.
Moody’s Investors Service on Tuesday downgraded Portugal’s ratings by a notch from A3 to Baa1 and warned that it expected the country to have to seek outside help to resolve its debt problems.
“Pressure on Portugal to ask for external aid is mounting both internally and externally,” said Tullia Bucco, an analyst at UniCredit.
The government had earlier denied that it had launched negotiations with its European partners to obtain emergency funding.
“The information is false. These are only rumours without foundation. We deny them, there no type of contact at all,” a official in the Socrates’ office told AFP earlier Wednesday.