More bailouts loom as debt crisis sweeps Europe

Europe faced more seemingly inevitable bail-outs today as it battled to keep the debt crisis from engulfing country after country.

Portugal passed austerity measures to fend off the speculative trades pushing it toward a rescue and Ireland rushed to negotiate its own imminent bail-out.

As Portugal and Spain insisted yesterday that they would not seek outside help, creating an eerie sense of deja-vu for investors, Europe looked set to face inevitable - and more expensive - bail-outs.

The Portuguese parliament approved an unpopular debt-reducing package, including tax increases and cuts in pay and welfare benefits. But while that helped to avoid a sharper deterioration in bond markets, the sense among analysts was that the move had bought only a little time.

Adding to the pressure, Ireland's major banks were hit with credit downgrades - one to junk bond status - as speculation mounted that the EU-International Monetary Fund bail-out of Ireland, to be revealed within days, would require investors to take losses, a possibility earlier denied by officials.

"This confusing 'pea-soup' of indecision, vacillation and disunity by the EU is beginning to create unnecessarily seismic waves of fear in international bond and money markets," said David Buik, markets analyst at BGC Partners.

Yields in fiscally weak eurozone countries remained near record highs yesterday, stocks slumped across the board and the 16-nation euro lost another 0.8% on the day to trade at $1.3241, just off two-month lows.

Portugal's high debt and low growth have alarmed investors, but the government insists it does not require an international rescue - a line ominously reminiscent of claims by Greece and Ireland before the capitulations.

Analysts say markets need more reassurance from EU leaders that the rot can be stopped in Portugal before spreading to Spain, the continent's fourth-largest economy - a scenario that would threaten the euro currency itself.

The financial crisis took a step in that direction this week, as it increasingly becomes apparent that bond investors will not be pacified by austerity measures but want weak countries' public finances to be plugged once and for all.

Greece, which accepted a bail-out six months ago, and Ireland are still far from being able to return to international debt markets.

Ireland wallowed in political turmoil yesterday, frightening investors with the prospect of a power vacuum even as it must pass its bail-out and austerity plan.

Portugal's finance minister Fernando Teixeira dos Santos acknowledged that some in Europe did not agree with his government's refusal to consider a bail-out.

"There are those among our (EU) partners who think the best way to ensure the euro's stability is to push and force those countries which are most in the spotlight to accept assistance," he was quoted as saying in the Jornal de Noticias newspaper.

The European Commission, the European Central Bank and the German government denied they were pressuring Portugal to take financial aid.

Portuguese prime minister Jose Socrates said after parliament approved the 2011 spending plan that the country had "no alternative at all" to the belt-tightening. "We must make this effort," he said.

Mr Teixeira dos Santos said he believed Portugal, which also suffered a major strike this week by disgruntled workers, had six months to show markets it could bring spending under control, but analysts say the country could face the need for a bail-out as early as January.

Markets have been jaded by policymakers' lack of coherence and determination in their response to the debt crisis. So when Spanish prime minister Jose Luis Rodriguez Zapatero declared yesterday that there was "absolutely" no chance Spain would seek a bailout, the statement failed to instil confidence.

Although Portugal's banks are said to be sound and the country's budget deficit last year was lower than those of Greece, Ireland and Spain, its high debt load compared with its gross domestic product and its meagre growth of around 1% a year have made it vulnerable to market jitters.

Portugal also has a record of poor financial management.