- Associated Press - Monday, January 10, 2011

LISBON | Borrowing rates for Portugal briefly spiked Monday after reports over the weekend that Germany and France are pushing it to accept outside help to keep the debt crisis in Europe from spreading.

The yield on Portuguese 10-year bonds, a key gauge of investor sentiment, rose to 7.18 percent at one point, its highest since the adoption of the euro and a potentially unsustainable level, before falling back to 6.94 percent.

Portuguese officials have sought the help of China, which already has used its foreign currency reserves to buy Greek and Spanish debt and help stabilize those nations.

The finance minister of Portugal went to China twice late last year, and Chinese President Hu Jintao promised in November to help Portugal out of its financial crisis. Beyond that, discussions between the two nations have been secretive.

Openly accepting the help of the International Monetary Fund or other European nations, on the other hand, is a less politically palatable option for Portugal’s leaders because it would be seen as an embarrassment and a failure.

The spike in yields followed a report in German newspaper Der Spiegel that Paris and Berlin are both pressing Portugal to tap a European rescue fund to keep the crisis from spreading to Spain, which has a much bigger economy.

The prevailing view in the markets is that Europe may be able to support Portugal but that a bailout of Spain would test the limits of the existing bailout fund, potentially putting the euro project itself in jeopardy if governments don’t put up more cash.

Still, German Chancellor Angela Merkel said Monday during a visit to Malta that Portugal has not asked for help, “and it is not being pushed into it by Germany,” according to the DAPD news agency.

A spokesman for the European Union’s monetary affairs commissioner also denied that European officials were preparing a bailout.

Since the bailout of Greece in May, the European Central Bank (ECB) has taken a more active role in Europe’s debt crisis by buying the bonds of the most imperiled eurozone countries.

As of last week it had bought $96 billion in government bonds, withdrawing the same amount of money from the economy to avoid inflation.

The U.S. Federal Reserve, by contrast, can effectively create new money, a step the ECB is loath to take.