DUBLIN/LISBON (Reuters) - Ireland hammered out the final details of an EU/IMF rescue on Friday as financial market pressure mounted on Portugal and Spain despite vehement denials from euro zone governments that they too might require bailouts.
The euro currency dipped as low as $1.32 for the first time in over two months and shares on both sides of the Atlantic fell amid fears the currency bloc’s debt crisis could deepen further and the 85 billion euro (72 billion pound) package for Ireland might not be the last.
The bloc’s woes and the seeming inability of its leaders to unite behind a plan to stem the contagion has prompted some experts to speculate the 16-nation currency area could splinter apart, but the costs of a breakup would be catastrophic and the chances are still seen as extremely slim.
European officials were forced to deny a German newspaper report on Friday that Portugal was under pressure from some of its euro zone partners to follow Ireland and seek a rescue in order to prevent contagion to its much larger neighbour Spain.
EU Commission President Jose Manuel Barroso, a former Portuguese prime minister, dismissed the report in the Financial Times Deutschland as “absolutely false, completely false,” saying an aid plan for Portugal had neither been requested nor suggested.
Risk premiums on Portuguese and Spanish debt were hovering near their highs on Friday.
The premium investors demand to hold Irish government bonds rather than German benchmarks hit a new euro-lifetime peak of close to 7 percentage points following reports that senior bondholders would share the cost of rescuing Ireland’s troubled banks.
Portugal’s struggles to meet fiscal targets for this year have increased investor doubts about the credibility of its consolidation strategy.
Its parliament approved a 2011 austerity budget on Friday designed to address those concerns and trim its budget deficit to 4.6 percent of gross domestic product, from a projected 7.3 percent this year.
“Portugal has all the conditions to finance itself in the markets as it has done,” Portuguese Prime Minister Jose Socrates told foreign journalists in Lisbon. “I have good expectations that approval of the budget will reinforce confidence in the markets.”
A Reuters poll this week showed 34 out of 50 analysts surveyed believe Portugal will be forced to ask for help although only four thought Spain would end up seeking aid.
The European Union could easily manage a rescue of Portugal but coming to the aid of Spain, the euro zone’s fourth largest economy, would stretch the 750 billion euro loan facility it set up with the IMF back in May after a bailout of Greece.
Worries about contagion pushed even German bonds off their highs late on Friday as investors worried Berlin may be asked to shoulder the costs of more bailouts.
“Germany may ultimately be dragged into this as well in terms of having to bail out their neighbours. The money obviously has to come from somewhere,” said Michael Leister, a strategist at WestLB.
Ireland’s unpopular government, whose bailout terms are expected to be announced on Sunday, suffered a new blow when Prime Minister Brian Cowen’s ruling Fianna Fail party was forced to concede defeat in a parliamentary by-election.
The loss further weakens the government’s ability to pass spending cuts and tax increases of 15 billion euros on which the bailout depends, including 6 billion euros of savings in its 2011 budget which is due for a vote on December 7.
A report late on Friday from state broadcaster RTE said the interest rate on the bailout funds being negotiated with the EU and IMF would be between 6 and 7 percent, at the high end of expectations.
The main opposition party Fine Gael said such a rate would be unacceptably high, potentially creating a new hurdle for the government as it works to complete the deal and secure passage of the 2011 budget with its razor-thin majority.
Spanish Prime Minister Jose Luis Rodriguez Zapatero said on Friday there was “absolutely” no chance Madrid would follow Ireland and Greece and seek financial help.
Spain hopes its austerity measures, progress on deficit reduction and restructuring of its weaker banks will enable it to weather the storm.
Unlike the other peripheral euro countries that have come under pressure this year, Spain is on track to meet its deficit reduction targets, having cut its budget shortfall by 47.3 percent in the January-October period compared with a year earlier.
Were the EU to be forced to help, meeting Spain’s financing needs for 2-1/2 years would cost 420 billion euros, consultancy firm Capital Economics estimates. That would exhaust virtually all of the 440 billion euro European Financial Stability Facility (EFSF) the euro zone set up after the Greece bailout.
The EFSF, a separate EU fund and International Monetary Fund backing could provide loans worth 750 billion euros in total.
German Bundesbank chief Axel Weber, an influential member of the European Central Bank, said this week the EFSF and other EU rescue funds had enough money to cover the borrowing needs of Greece, Ireland, Portugal and Spain.
But he added: “If that is not enough, I am convinced euro zone states will do what is necessary to protect the euro.”
On Thursday, top EU officials said there was no risk of the euro zone breaking up and German Chancellor Angela Merkel — who unsettled markets earlier this week by saying the euro was in an “exceptionally serious” situation — said she was confident the euro area would emerge stronger from the crisis.
Additional reporting by Dave Graham in Berlin; Jan Strupczewski in Brussels; Writing by Noah Barkin