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Debt-ridden Portugal suffered another blow on Wednesday in its fight to avoid an international bailout when borrowing costs rose sharply in a government Treasury bill auction. |||

Debt-ridden Portugal suffered another blow on Wednesday in its fight to avoid an international bailout when borrowing costs rose sharply in a government Treasury bill auction.

All the 500 million euros in 12-month T-bills on offer in the auction were sold. But yields rose to a euro lifetime record of 5.281 percent up from 4.813 percent two weeks ago, demonstrating sagging investor confidence in the Iberian nation now in the frontline of the euro zone debt crisis.

“Should bond yields not ease soon, there is a significant chance of Portugal being the next country having to seek an EU bailout,” said Diego Iscaro, an economist at IHS-Global Insight in London.

A defiant Prime Minister Jose Socrates on Tuesday night denied Portugal needed to call for rescue.

“We don’t need any help. We will do all we can ourselves,” Socrates told reporters.

Germany’s Economy Minister Rainer Bruederle offered him support just before the bond auction, saying he did not believe Portugal and Spain would need to tap euro zone rescue funds.

But the Standard & Poor’s rating agency said on Tuesday it might cut Portugal’s credit rating.

The minority Socialist government is striving to demonstrate that Portugal can avoid becoming the latest euro zone domino to fall after Greece and Ireland, hoping that tax rises and cuts in public spending planned for next year will do the trick.

Ireland agreed an 85 billion euro ($113 billion) bailout package from the European Union and the International Monetary Fund last weekend.

Economists fear that unless Portugal takes the same medicine, the contagion will spread to its neighbour Spain, a considerably larger economy whose rescue could ransack EU funds.

Spanish investors are heavily involved in Portugal, especially banks. Ironically, Wednesday was a public holiday in Portugal marking independence from Spain in 1640. Lisbon markets were open but with reduced staff.

ROWING TO BAILOUT

Filipe Garcia, president of Informacao de Mercados Financeiros consultants in Porto, said the debt auction was the latest development pushing Portugal towards a bailout.

“What worries me most is that if the state only manages to get financing at these rates, how much will companies that have to turn to the international markets for financing have to pay,” he said.

Socrates, in his comments on Tuesday, said a rise in borrowing costs was affecting several European countries and he saw no reason to change his government’s position.

He would not comment on Standard & Poor’s warning that it might cut the country’s A-minus credit rating after a three-month review. S&P cited uncertainties over the country’s growth prospects and possible need for foreign financial aid.

Socrates last week pushed through an austerity budget which will raise taxes and cut public sector wages. So far this year the government has been unable to cut spending as planned.

The government expects the economy to grow at least 1.3 percent this year, mainly thanks to growing exports, after last year’s 2.6 percent contraction. Next year it predicts an expansion of just 0.2 percent and many economists say the economy will slide back into a recession. – Reuters

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