Portugal will probably follow Greece and Ireland at some point in seeking bailout funds from the European Union, according to a majority of economists in a monthly Reuters poll.
Thirty-four out of the 50 analysts who answered an extra question in Reuters' monthly interest rates poll said Lisbon would be forced to seek outside financial help, with four also saying Spain would eventually have to be bailed out.
The poll did not specify when such bailouts might be required but financial markets are already turning their focus away from Ireland and speculating about other smaller euro zone countries that are facing grave fiscal challenges.
Portugal's bond yield spread over 10-year German government bonds — a measure of the pressure markets are putting on Lisbon and the chances of default — touched a a euro-lifetime record of 481 basis points on Wednesday. Ireland's are around 645 basis points while Spain's have also risen to 260 bps.
The wider survey of 74 economists also showed the European Central Bank would keep interest rates on hold until the fourth quarter of next year, with some pushing back their rate hike predictions into 2012.
"The cost of funding has gone to prohibitive levels for Portugal — it is impossible to think they could continue to roll over their debt next year if (market) interest rates remain where they are now," said Silvio Peruzzo, economist at RBS.
Countries like Greece, Ireland and now Portugal have seen a structural economic shift, he said, moving into a new equilibrium of poor economic growth and higher funding costs that ultimately requires outside help.
"The market's going to squeeze you like a lemon, basically," said Peruzzo.
Like Ireland and Greece, Portugal this year announced vast budget austerity measures aimed at convincing financial markets it can deal with its debt burden itself while issuing bonds at affordable rates.
EU President Herman Van Rompuy said on Tuesday he saw no need for Portgual to seek outside help, explaining that its circumstances were very different from Ireland's.
The EU and IMF offered Ireland an emergency funds deal on Sunday dependent on Dublin passing an austerity budget on time in December — something by no means certain given a political fight that threatens to topple the current government.
DIVERGENT DILEMMA
While the debt crisis rages on in the euro area's periphery, the core German and French economies have been performing well, pointing to the case eventually for higher interest rates.
Business surveys released on Tuesday showed a strong resurgence in German and French private sector growth while the periphery stagnates, while Wednesday's closely-watched German Ifo business sentiment survey hit a record high in November.
"Pressure from core countries, particularly Germany, (for the ECB) to normalise conventional policy rates is going to build," said Ken Wattret from BNP Paribas.
ECB policymakers next week also have to decide how best to unwind the emergency liquidity measures it introduced to ease money market stresses.
"The exit from unconventional policy measures will continue, though probably more slowly given ongoing problems in sovereign debt markets," said Wattret.
Despite the debt market ructions, 27 out of 49 economists who answered the question said ECB staff would probably revise up their 2010 economic growth projections, while 19 said they would revise up forecasts for 2011 growth.
ECB staff in September projected economic growth of between 1.4 and 1.8% for 2010 and between 0.5 and 2.3% next year.
