Steve Dinneen
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MARKETS rejected the €85bn (£71.6bn) bailout of Ireland yesterday, as traders turned their attention to those countries they think could be next: Portugal, Spain and Italy.

EU finance ministers had hoped the deal would inspire confidence, but the FTSE closed down two per cent to its lowest level in two months, while the US’ Dow Jones slipped 0.3 per cent to 11,052.49. The Ibex index of Spain’s 35 leading stocks also lost significant ground in Madrid, closing down 2.3 per cent. And the price of insuring Portuguese debt climbed ever higher, with five-year credit default swaps (CDS) closing 45 basis points higher at 545, and Spain’s rising 43 basis points to 350. The bond market gave a muted response to the Ireland rescue, with Portuguese yields falling only marginally to just below seven per cent. Spanish yields continued to creep up, hitting 5.5 per cent – more than double that of Germany. Italy also strayed closer to the danger zone as its bond yields hit 18-month highs of 4.54 per cent following a disappointing auction of government debt.

Portugal has strongly resisted the suggestion it may require a bailout but its high debt and slow growth have left it in a precarious position.

It yesterday said a tough austerity Budget, backed by EU finance ministers, would be enough to pull it through. But analysts are increasingly sceptical about its ability to meet ambitious growth targets.

UniCredit Research said that despite the Ireland deal, the Eurozone may come under “continued pressure to provide a package for Portugal at least”.

And Professor of economics at New York University Nouriel Roubini added to Portugal’s plight by saying it should apply for a bailout now before its situation deteriorates even further.

“A bailout happened in Greece. It happened in Ireland, and it’s going to happen in Portugal,” said Roubini, who is known as “Dr Doom” for predicting the credit crisis before 2007.

He added: “The question is whether it could happen in Spain. The eventual fiscal cost of cleaning up its financial system will be much larger than has so far been estimated by the government.” However, he believes Spain could prove “too big to bail out”.

Chancellor George Osborne will hope Portugal and Spain can, in the short term at least, resist a bailout.

As part of the Ireland rescue package he won a concession that the UK will not contribute to a new bailout fund, set to replace the European Financial Stability Mechanism (EFSM), in 2013. However, if Portugal or Spain stumbles before then, the UK will be forced to contribute to another rescue package.