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Debt crisis worsens as Portugal’s woes grow

THE European debt crisis has deepened, sparking new fears that Portugal will be the latest eurozone country to seek a bailout and British taxpayers will have to contribute billions of pounds to the rescue fund.

Portugal’s financial woes intensified last week after the interest rate on the country’s 10-year bond surged to a new euro-era record of 7.9% and Standard & Poor’s downgraded the Portuguese credit rating.

Revised figures published on Thursday showed Portugal’s deficit was more than a percentage point above target at 8.6% of GDP, bringing the debt burden Lisbon is struggling to finance to 92.4% of its annual output.

At the same time, S&P also reduced Greece’s rating saying the European Union’s new bailout rules may mean both nations eventually default on their debt obligations.

S&P cut Portugal, which has has one of the eurozone’s smallest and weakest economies, for the second time in a week to the lowest investment-grade rating of BBB-. The downgrades left Portugal one notch above junk and Greece’s creditworthiness below that of Egypt, deepening the debt troubles for two of the weakest eurozone nations.

Greece’s rating fell two grades to BB-, three levels below investment grade. S&P cited concerns that both countries will be forced to restructure debt after seeking rescue funds from Brussels. “Apparently the rating agency sees the risk of the ESM (European Stability Mechanism) triggering a situation when the debt is not safe,” said Silvio Peruzzo, an economist at Royal Bank of Scotland in London. “If a country defaults, the ESM, as a senior creditor, gets the money before investors and investors may take a loss.”

The downgrades increased pressure on European policymakers trying to stem the crisis almost a year after Greece became the first eurozone member to seek a bailout.

Even though Portuguese Prime Minister Jose Socrates has repeatedly denied his country needs help, investors are increasing bets it will be forced to follow Greece and Ireland into seeking aid from the European Financial Stability Facility.

The Portuguese Government collapsed last week after it was unable to push through parliament further measures to plug its deficit and fend off the need for outside aid.

Portugal’s president dissolved Parliament on Thursday and set June 5 as the date for the next polls, meaning the country is effectively in limbo for two more months. The caretaker government does not have the power to request a bailout.

While Portugal can probably go on financing itself for the next eight weeks – it has to refinance €4.3 billion of debt in April and €4.9bn in June – the cost of doing so is likely to go on being punitively high.

S&P said the country would probably need an international bailout. Analysts suggest that Portugal’s current cash position is sufficient enough to cover the April redemption, but not the one in June. In the case of Greece, the agency said the downgrade reflected the view a sovereign debt restructuring was likely and would probably be a condition for Athens to borrow from the EU scheme.

The agency also cited “growing risks to Greece’s budgetary position.” It said recently released provisional data on the government’s 2010 balance indicated “a relatively higher cash deficit and larger outstanding spending arrears than planned.”

That suggests that last year’s deficit could exceed the government’s target of 9.6% of gross domestic product. It also said the government was unlikely to hit its 2011 budget deficit target of 7.5% of GDP.

“We believe that the government has not tightened spending controls sufficiently to prevent further accumulation of arrears in 2011,” it said. “Government revenues have been underperforming budgetary expectations, most recently in the current quarter.”

Ireland, too, remains in a precarious position. The borrowing rate on the Irish 10-year note jumped to 9.7% last week and the jobless rate stands at 14.7% – the highest in 17 years.

The Republic’s government asked for €85bn in emergency loans last November from the EU and the International Monetary Fund after it was frozen out of debt markets and has so far drawn down a total of €18.4bn.

The Central Bank of Ireland said on Thursday that the country’s troubled banking sector will require a further €24bn recapitalisation, pushing the total cost of bailing out the banks to a staggering €70bn.

This is the fifth attempt to draw a line under the banking crisis, which has so far cost the Irish state €46bn, and will bring the entire banking sector under government control.

It also means the government will require substantially more of the €35bn allocated for the banks under the bailout deal from the EU and the IMF than previously envisaged.

Portugal’s plight has ramifications in the UK. At a time of brutal spending cuts at home, British taxpayers are going to have to dig deep for Portugal, to the tune of billions as they did for the Irish bailout last year. Ireland received a £3.25bn bilateral loan from Britain, which has mainly been used to shore up its debt-ridden banks.

Eurosceptic Tory MPs are furious. Douglas Carswell MP has tabled Freedom of Information requests, demanding to know whether George Osborne, agreed to British involvement in the bailout of eurozone countries in the turbulent few days after the 2010 General Election.

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