Markets hammer Spain, Portugal despite protests

(MADRID) - Investors hammered Spanish and Portuguese debt and depressed the euro Friday despite protests by Madrid and Lisbon that they have no need of an Irish-style rescue.

Ireland's unfolding banking catastrophe has sparked fears of a domino-style cascade reaching Portugal and the much larger economy of Spain, with far-reaching consequences for the eurozone.

Fund managers investing in sovereign debt warn that if the crisis takes down Portugal and then Spain, the eurozone and single currency would have to be radically restructured.

Spanish Prime Minister Jose Luis Rodriguez Zapatero "absolutely" ruled out the prospect of an Irish-style rescue for Spain, which has a jobless rate of 20 percent and posted zero economic growth in the third quarter.

"I am not delivering a message of confidence just because I want to but because of concrete facts," Zapatero said in an interview with Catalan radio RAC 1.

Spain's public debt was lower than the European average, he argued. Public debt averaged 74.7 percent of gross domestic product for member states in 2009 compared to 53.2 percent in Spain, European Union data show.

"Those who make short term bets against Spain will be making a mistake," Zapatero said, adding that there was "no scenario" under which a rescue of Spain could be envisioned.

Nevertheless, investors were shying away from Spanish and Portuguese debt unless they received a significant interest rate premium.

The Spanish debt risk premium -- the gap between safe-bet German 10-year bonds and comparable Spanish bonds -- leapt to a record 2.60 percentage points before easing a little in late trade.

The higher rate -- a few months ago the gap was 1.70 percentage points -- makes it harder for Spain to raise money on the markets.

Portugal's 10-year bonds hit a record rate of 7.121 percent before easing just below 7.0 percent after the parliament approved a cost-cutting 2011 budget. Its debt risk premium was 4.24 percentage points.

The European Union also stepped in to quash a Financial times Deutschland report that European states were pressing Portugal to tap its 500-billion-euro (664-billion-dollar) bail-out fund.

"No reference to an aid plan for this country has been asked for and none has been suggested," European Commission President Jose Manuel Barroso told reporters in Paris.

The Portuguese government through its spokesman also denied that there had been "any pressure from the ECB (European Central Bank) or European countries for Portugal to accept aid."

Finance Minister Teixeira dos Santos, describing the eurozone debt crisis as "a situation of contagion and instability," insisted that his government was determined "to ensure the conditions for Portugal to continue to finance itself on the markets."

A former head of the German council of economic experts, Juergen Donges, meanwhile told the Spanish daily El Economista that Spain's economy was nine times the size of Ireland's.

"If according to some calculations Ireland needs 80 billion (euros) then Spain would need 800 billion," Donges said.

"The European Financial Stability Fund does not have that much money so you would need either to give the plan more resources, which is not the solution, or tell Spain to fix things as best it can, which is not a remedy either," he said.

Concerns over the eurozone hurt the currency. The euro traded at 1.3230 dollars, down from 1.3360 late Thursday, representing a sharp fall from the week-earlier level of 1.3645 euros.

Negotiations on Ireland's bailout were expected to wrap up on Sunday, according to diplomatic sources in Brussels.

In a sign of the popular anger over the Irish crisis, the embattled government conceded defeat in a by-election for the seat of County Donegal in northwest Ireland.

The defeat in Thursday's election trimmed its parliamentary majority to just two seats.

The seat was previously held by Prime Minister Brian Cowen's Fianna Fail party and the loss was likely to increase calls on his coalition government to hold a snap election.

Having built up a deficit equivalent to 32 percent of gross domestic product this year, Ireland is in talks to borrow about 85 billion euros (114 billion dollars) from the EU and IMF.