Lisbon, Portugal — Europe’s efforts to contain its debt crisis came under increasing strain Tuesday as bond market jitters shook Portugal and Spain, seen as the 16-nation eurozone’s next-weakest links now that Ireland has followed Greece by accepting a huge international rescue.
Portugal’s borrowing costs rose, suggesting that investors are more worried about default, while Spain limited the size of a bond sale because traders demanded sharply higher premiums.
Stock traders panicked and dumped shares across all sectors, sending Portugal’s benchmark stock index down 2.2 percent by the close, while Spain’s sank 3.1 percent to a level not seen since July. The euro slid below $1.34 for the first time in two months.
Spooked by the scale of Greece’s bailout requirements in May and Ireland’s banking failures, international investors are looking much closer at the public finances of eurozone countries and they don’t like what they’re seeing, particularly in Portugal.
Traders are “looking for their next target” and Portugal fits the bill, said Emilie Gay, an analyst at Capital Economics in London. She predicts Portugal will have to ask for help by early next year, when it has to begin refinancing billions of euros in government bonds. A bailout for Portugal would cost at least $66.8 billion, according to Capital Economics.
European Union President Herman Van Rompuy insisted Portugal’s finances are sound because the country’s banks are well capitalized, they haven’t had to cope with a housing market bubble, and the government has a strong program to bring the deficit down.
Asked during a visit to Stockholm whether the Irish bailout package was big enough and whether it can prevent the crisis spreading, Van Rompuy said “there is no need for help in Portugal and of course the safety net is big enough to support Ireland.”
Portugal accounts for less than 2 percent of the eurozone’s total economy but a potential bailout would crank up pressure on Spain, the European Union’s fourth-largest economy.
Analysts at Capital Economics described the risk of a Spanish bailout as “fairly low” but warned that “the cost would be devastatingly high.”
“This threat is therefore closely linked to the risk of some form of eurozone breakup, stemming either from Spain being forced to leave and default or perhaps even from Germany jumping ship,” the analysts said in a report to investors Tuesday.
Ireland’s decision to accept a loan to prop up its banks, which may reach $136 billion, and make sharp budget cuts has come just six months after the EU and IMF provided a similar sum for Greece.
Greece, meanwhile, is still grappling with its promised changes and must make an extra effort to meet next year’s deficit targets, its international donors said Tuesday.
The establishment of a $1 trillion safety net, after Greece’s bailout, for any other eurozone members facing the risk of imminent loan defaults has done little to quell market fears.
Portugal’s recent public finance figures have sharpened concerns’ about its ability to handle its debt load. Public spending rose 2.8 percent in the first 10 months of the year compared with a year earlier. Crucially, higher interest payments on its loans outweighed an increase in tax revenue, suggesting the weight of existing debt may be unsustainable as it offsets any progress in public finances.
The interest rate on 10-year Portuguese bonds rose to 6.9 percent Tuesday from 6.8 percent the previous day. That was close to the record 7 percent reached earlier this month.
Information for this article was contributed by Alan Clendenning, Daniel Woolls, Ciaran Giles, Elena Becatoros, Shawn Pogatchnik and Louise Nordstrom.
Business, Pages 27 on 11/24/2010