Portugal on the brink as fear returns

PORTUGAL is scrambling to avoid being hit by the Eurozone debt crisis, amid mounting expectations of a third bailout for the currency region.

Analysts yesterday said that only the European Central Bank’s special bond purchasing programme is standing between the country and a rescue.

With Portugal facing its first sale of long-term debt tomorrow, figures show that the ECB intervened in debt markets to the tune of €113m (£94m) last week. Although this is down on its €1.12bn weekly intervention before Christmas, most observers think that Portugal is the main target of the action.

The country’s growing debt crisis is following a now-familiar pattern, when the yield on its ten-year debt soared to a record during the euro’s lifetime. It spiked over 7.1 per cent yesterday, a level that most regard as unsustainable.

IHS Global Insight’s Diego Iscaro said that tomorrow’s debt sale “is going to be a scene-setter”, with investors keeping a keen eye on the country’s rising costs.

Portugal’s Eurozone neighbours are putting pressure on the country to seek a rescue to calm bond markets. Despite its growth last year markets are unconvinced.

In a sign of market jitters, the euro sank to a four-month low against the dollar, dipping below €1.29 yesterday. If Lisbon does need a bailout, its cost is estimated to be similar to Ireland’s €85bn rescue, between €50bn and €100bn. At least half will come from European funds, taking another chunk out of the Eurozone’s €440bn bailout fund.

Fears for Portugal grew as political gridlock in Belgium added to the Eurozone debt crisis with yields on ten-year Belgian debt surging to a seven-month high. The 4.25 per cent yield forced Belgium’s King Albert II to intervene asking the temporary government to draft a new tighter 2011 budget in an attempt to defuse fears of runaway deficits amid a political vacuum that has seen the country without a new government since its June elections.