Pressure on Portugal heightens amid debt fears

Europe's debt crisis flared up once again Monday, as Portugal's borrowing rates briefly spiked to euro-era highs amid reports Germany and France are pushing it to accept outside help to avoid contagion to other countries.

The yield on Portuguese 10-year bonds - a key gauge of investor sentiment - touched a potentially unsustainable 7.18 per cent at one stage Monday.

It then fell back to 6.94 per cent on speculation that the European Central Bank (ECB) was intervening by buying bonds. Yields drop as prices rise.

"I wouldn't be surprised if the ECB is trying to stabilise markets, but it's a band-aid approach," said Neil Mackinnon, global macro strategist at VTB Capital. "All it does is that it kicks the can down the road; it doesn't resolve the underlying issues."

Since the bailout of Greece in May, the ECB has taken a more active role in Europe's debt crisis by buying the bonds of the most imperilled eurozone countries. As of last week it had bought €74 billion (US$96 billion) in government bonds. It doesn't have a target or limit, but withdraws that same amount of money from the economy to avoid inflation risks.

The US Federal Reserve, by contrast, does not withdraw any cash, meaning it effectively creates new money - a step the ECB is still loathe to take.

Monday's early spike in yields followed a report in German newspaper Der Spiegel that France and Germany are both pressing Portugal to tap a European rescue fund to keep the crisis from spreading to much-bigger Spain.

"We have never pushed countries to take a certain step, and we will not do so in any other case," German Chancellor Angela Merkel said during a visit Monday to Malta, according to the DAPD news agency.

Portugal has not asked for help, "and it is not being pushed into it by Germany," Merkel added.

Amadeu Altafaj Tardio, the spokesman for EU Monetary Affairs Commissioner Olli Rehn, also denied that European officials were preparing a bailout for Portugal.

"There is no discussion to this effect and none is envisaged at this stage," he said.

Analysts estimate that financial assistance for Portugal, which has been dogged by low growth and rising debt levels, would be between €50 billion and €100 billion (US$65b and US$130b).

Though Portugal insists it does not need a rescue, experts say the events distinctly echo what went on with Ireland just a couple of months ago.

- AP