- Associated Press - Wednesday, November 24, 2010

LISBON (AP) — Portuguese and Spanish borrowing costs rose sharply Wednesday as investors worried that the governments’ debt loads will prove unsustainable, putting them next in line for a European bailout, and as a major public sector strike hit Portugal.

The interest rate on Portugal’s 10-year bonds broke through the 7 percent barrier before easing slightly. The equivalent Spanish bond yield rose to 5.08 percent at mid-morning from 4.91 percent at the start of trading. By contrast, 10-year yields for Germany — considered the benchmark — were only 2.7 percent.

Neither Iberian country is at immediate risk of bankruptcy as Portugal has no major bond sale before January and the borrowing rate for Spain, which has two auctions before the new year, is still manageable. But the rates make already heavy debt loads more expensive to finance.

The higher cost to roll over even short-term debt has been eating away at any progress the governments make in their public finances through austerity measures. That was illustrated in Portugal’s latest public spending figures, in which higher loan interest costs more than offset a rise in public revenues. Consequently, spending through October was up 2.8 percent.

The bond yields have been moving higher since Ireland accepted an EU-IMF bailout this week because investors demand a higher return for lending to countries with shaky finances.

The market tensions pushed Lisbon’s benchmark stock index, which has witnessed steep drops all week, down another 0.4 percent in early trading before recovering to gain 0.6 percent. Spain’s main index fell 1.1 percent after opening but was up 0.7 percent by early afternoon.

Portugal and Spain are viewed as the 16-nation eurozone’s next weakest links now that Ireland has followed Greece and accepted a massive international rescue.

Portugal accounts for less than 2 percent of the eurozone’s total economy but a potential bailout for Lisbon would add to the pressure on Spain, the European Union’s fourth-largest economy, and entail possibly dramatic repercussions for the entire bloc.

The euro dropped to a two-month low against the U.S. dollar on Wednesday on concerns about the bloc’s financial health.

Portugal’s minority government has repeatedly insisted it doesn’t need financial assistance because its austerity plan will drive down the country’s debt burden.

But Eurasia Group, a New York-based research and consulting company, said in a report Wednesday that European officials don’t expect the eurozone’s problems to stop at Ireland and that a rescue plan for Portugal could be unveiled by early next year, when it is due to resume government bond sales.

“There is a strong presumption that a package will be necessary for Portugal and the related planning is underway,” Eurasia Group said. “Portugal will be pressed hard to accept a package even if the Portuguese government claims the country does not need it.”

Analysts have estimated Portugal will need at least 50 billion euros ($67 billion).

Spanish Finance Minister Elena Salgado also insisted Wednesday that Spain has no need whatsoever for a bailout like Greece and Ireland. She said in a radio interview that the Bank of Spain’s strict rules for the country’s banks have ensured the Spanish financial system is healthy.

Though they insist their banking systems are in good order, the Iberian neighbors face similar challenges in reducing debt amid meager growth.

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