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Spain says will not be next domino after Portugal

Spain strove to distance itself from Portugal’s debt woes that have forced it to seek EU assistance, insisting on Thursday it would never ask for a similar bailout of its battered economy.

After insisting for weeks it did not need to go cap-in-hand to Brussels, the Portuguese government threw in the towel on Wednesday, bowing to intense market pressure and paving the way for a third bailout of a eurozone country after Ireland and Greece last year.

Outgoing Portuguese Prime Minister Jose Socrates said an EU rescue plan became inevitable when lawmakers last month rejected new austerity measures presented as the last chance to balance the country’s strained public finances.

Analysts have said that Portugal could require a package worth 70 billion euros (100 billion dollars), compared with 85 billion euros for Ireland and 110 billion euros for Greece.

Portugal’s Lusa news agency Thursday said the caretaker government will only make a formal request to the EU after talks with the opposition on the terms of a deal.

A European Commission spokesman said it said expects Portugal to formally request a bailout soon and stands ready to send experts to Lisbon to negotiate the terms.

The reaction on the Lisbon stock market was positive, with the main stock market index up 1.50 percent in early trade as investors welcomed the move as providing at least some level of certainty after months of speculation.

As EU finance ministers gathered in Budapest to decide how to contain the eurozone debt crisis, German Finance Minister Wolfgang Schaeuble described Lisbon’s decision as a “sensible and necessary step” given the country’s economic and financial situation.

The pressures on Portugal had raised doubts about other weak eurozone members including its wealthy neighbour Spain, the eurozone’s fourth largest economy.

“While we believe chances are good that (Spain) will not need external help, there is no guarantee,” said Christoph Weil, an analyst with Commerzbank.

Any such bailout would be bigger than those of Greece, Ireland and Portugal combined, possibly threatening the whole eurozone project.

But Spain, which has enacted stringent budget cuts, and labour, pension and banking reforms so as regain market confidence, is determined not to be the next eurozone domino to topple.

“Spain is not at risk at all after Portugal has asked for a rescue,” Finance Minister Elena Salgado told Spanish National Radio (RNE) on Thursday.

She emphasized 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.

The European Commission backed Spain Thursday, saying that the government was meeting its deficit-cutting goals despite economic challenges.

“Spain must be judged on its on merits. Spain is on track to meet its objectives in terms of deficit reduction for 2010 and 2011,” said Amadeu Altafaj, commission spokesman for economic affairs.

Spain’s Socialist government is battling to bring the public deficit, which soared to 11.1 percent of gross domestic product in 2009, down to the EU limit of 3.0 percent by 2013.

In another vote of confidence, Spain enjoyed lower interest rates in a multi-billion-euro bond auction on Thursday.

The head of the IMF, France’s Dominique Strauss-Kahn, said in an interview published Wednesday in Spanish daily El Pais that Madrid has taken the correct financial steps and had no need for international aid.

Jesus Castillo, a southern Europe specialist at the Natixis bank, said “several indicators show that Spain is different” from Portugal.

He noted in particular the tough economic reforms in Spain, the political crisis in Portugal and the fact that Lisbon’s public debt was far higher than Madrid’s.

“But the medium-term outlook is that Spain remains a fragile economy, which must balance its public finances,” he said.

The Spanish economy contracted 0.1 percent in 2010 after shrinking 3.7 percent in the previous year following the collapse of a property boom that had fueled growth for more than a decade.

The crisis sent the unemployment rate soaring to 20.33 percent at the end of 2010, the highest in the developed world.