- Associated Press - Wednesday, January 12, 2011

LISBON | Tensions over Europe’s simmering debt crisis eased slightly on Wednesday as ailing Portugal, viewed as the next candidate for a bailout after Greece and Ireland, showed it can still raise money on international markets and the EU proposed to boost the size and powers of its rescue fund.

But the relatively high interest rate demanded by investors to lend Portugal $1.62 billion shows the country - and the wider region - still face an uncertain outlook.

“This is one hurdle that has been overcome, but it’s not the end of the problems for Portugal and the eurozone,” said Ian Stannard, an analyst at BNP Paribas. “This auction is not going to make the problems go away.”

EU officials seemed to accept the fact that the debt crisis is far from over and might even turn nastier if debt speculators target larger economies like Spain.

The European Union’s top monetary official, Olli Rehn, said he wanted a precautionary increase in the $570 billion bailout fund for debt-stressed eurozone countries.

Though Germany, the bloc’s chief financier, has not yet committed to such a move, Mr. Rehn said discussions with the 17 eurozone governments are making progress.

Markets are worried the existing fund might be too small and the euro currency become endangered if a bigger economy like Spain, which makes up more than 10 percent of the eurozone economy, runs into financial trouble.

There were fears that Portugal’s first bond auction of the year might compound the eurozone’s problems, with speculation that interest rates could be punishingly high or that investors might even stay away from the auction due to concerns about the debt-laden country’s fiscal health.

However, Portugal was relieved to pay a far lower rate for its longer-term debt than previously. The government debt agency said it sold $840 million in bonds with a 2014 maturity and $775 million in 2020 bonds. Demand for both was more than twice the amount on offer.

The major source of encouragement came from the fact that the yield on the 2020 bond dipped to 6.716 percent from 6.806 percent the last time Portugal tapped investors in November.

“This expression of confidence in Portugal is of the greatest importance. It’s our first result” in the battle to restore market faith in the country, Portuguese Prime Minister Jose Socrates told reporters during a visit to a trade fair in Frankfurt, Germany.

Portugal reduced its budget deficit to at least 7.3 percent of gross domestic product last year, from 9.3 percent in 2009, according to the government.

It is aiming for 4.6 percent, roughly the eurozone average, this year.

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