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'Portugal will need EU-led bailout' : Economists

Source: Reuters - Fri 7th Jan 2011

Portugal will need a European Union-led bailout at some point similar to those handed out to Ireland and Greece last year, according to a strong majority of economists polled by Reuters.

Forty-four of 51 analysts who answered an extra question in Reuters' monthly interest rates poll said Portugal would eventually be forced to seek outside financial help, with seven also picking Spain. Five said no more bailouts would be needed.

Much of the survey was conducted before Portugal cleared its first funding hurdle of the year on Wednesday with a six-month treasury bill auction that saw yields rise, but within expected limits.

Still, the survey of economists from research consultancies, wealth managers and banks operating in Europe had a stronger majority saying Portugal would need a bailout than a poll from November, when 34 out of 50 analysts said so.

The latest poll also showed a median 65 percent probability Portugal would suffer another credit rating downgrade before the end of the first quarter, and Spain a 50 percent chance.

A poll of foreign exchange strategists conducted earlier this week came to a similar conclusion.

"We expect the sovereign debt crisis to resume in the form of a Portuguese bailout, which will probably keep interest rates on hold for longer," said Azad Zangana, European economist at Schroders.

DEBT DEMANDS

Last month Ireland's parliament approved an 85 billion euro ($112 billion) EU/IMF bailout package, under which Irish citizens face years of budget cuts and tax hikes in return for fresh capital to shore up the country's crippled banking sector.

Portugal, which like Ireland is trying to reduce a vast budget deficit with widespread austerity measures, has become the new focus for market speculation about a bailout.

Signs that Portugal can finance itself on the debt markets were boosted by Wednesday's sale of 500 million euros of T-bills. Demand at the auction outstripped supply by 2.6 times, although the rate on the six-month paper hit a euro lifetime record of 3.686 percent.

Portugal's debt agency has yet to detail other auctions for the first quarter of 2011 which could prove to be more difficult, particularly if credit rating agencies decide to downgrade the sovereign further in coming months.

"Whether or not other countries will require a bailout depends on the policies adopted by the euro countries," said Silke Tober, senior economist at German research institute IMK. "If they decide to offer guaranties and low-interest credit to the countries in need, downgrades will not take place."

Fitch Ratings cut Portugal one notch last month to A+ with a negative outlook, citing burgeoning debt levels and a tough financing environment, and Moody's said it could cut its A1 rating by one or two notches after a review.

Spain, which is also tackling a vast debt burden, has seen solid demand for its government debt recently, even if bond yields have risen.

On Thursday, Chinese Vice Premier Li Keqiang said his country is willing to buy around 6 billion euros of Spanish debt, Spanish newspaper El Pais reported, citing government sources.

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