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Investors' fears over debt rattle Spain, Portugal

A broker watches a display Wednesday at the stock exchange in Madrid. Spain is wrestling with a nearly 20 percent unemployment rate, and Portugal is expected to cut public employees’ pay and boost rates for income and sales taxes.

Associated Press

A broker watches a display Wednesday at the stock exchange in Madrid. Spain is wrestling with a nearly 20 percent unemployment rate, and Portugal is expected to cut public employees’ pay and boost rates for income and sales taxes.

LISBON, Portugal — Portuguese and Spanish borrowing costs rose to near record highs Wednesday as investors worried that the governments' debt loads will prove unsustainable, putting them next in line for a European bailout.

The interest rate on Portugal's 10-year bonds reached 7 percent, equaling a euro-era record. The equivalent Spanish bond yield rose to 5 percent at midmorning from 4.91 percent at the start of trading. By contrast, 10-year yields for Germany — considered the benchmark — were only 2.7 percent.

The bond yields have been moving higher since Ireland accepted an EU-IMF bailout this week because investors demand a higher return for lending to countries with shaky finances.

Neither Iberian country is at immediate risk of bankruptcy, as Portugal has no major bond sale before January and the borrowing rate for Spain, which has two auctions before the new year, is still manageable. But the rates make already heavy debt loads more expensive to finance.

The higher cost to roll over even short-term debt has been eating away at any progress the governments make in their public finances through austerity measures. That was illustrated in Portugal's latest public spending figures, in which higher loan interest costs more than offset a rise in public revenues.

Portugal and Spain are viewed as the 16-nation eurozone's next weakest links now that Ireland has followed Greece and accepted a rescue.

Portugal accounts for less than 2 percent of the eurozone's total economy, but a potential bailout for Lisbon would add to the pressure on Spain, the European Union's fourth-largest economy, and entail possibly dramatic repercussions for the entire bloc.

The euro dropped to a two-month low against the U.S. dollar on Wednesday on concerns about the bloc's financial health.

Though they insist their banking systems are in good order, the Iberian neighbors face similar challenges in reducing debt amid meager growth.

Spain's unemployment is at a eurozone high of 19.8 percent.

Portugal has borrowed huge amounts to finance welfare entitlements and consumption. Portugal's austerity package, due Jan. 1, cuts the pay of public employees by an average of 5 percent, trims welfare benefits and hikes income tax and sales tax. The measures are forecast to stifle already weak economic growth after a recession last year.

Investors' fears over debt rattle Spain, Portugal 11/24/10 [Last modified: Monday, November 7, 2011 1:24pm]
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