Portugal says it needs no help as euro faces a fresh crisis

The euro opened a new chapter in its existential crisis yesterday, as pressure mounted on the Portuguese government to apply for financial assistance, following the rescue of Greece and Ireland last year. Fears also mounted that Spain could be forced to quickly follow suit – in all likelihood exhausting the current European/IMF rescue fund. In Belgium, the King urged the caretaker government to take action on the budget deficit, as Belgian bonds also tumbled.

After expending some €110bn in Athens and €85bn in Dublin, a bailout of Portugal could cost an extra €100bn. While this is within the means of the €750bn EU/IMF fund, a Spanish rescue might well break it. The euro plummeted to four-month lows against the dollar, the yen and sterling in the increasingly febrile atmosphere.

European finance ministers meet next week, and are likely going to be faced with another rescue attempt.

Portugal faces another challenging government bond auction on Wednesday, trying to raise €1.25bn, and rumours have swept markets that the European Central Bank had been forced to buy Portuguese government bonds to prevent an even more precipitous sell-off and a further rise in the yields demanded by international investors to hold Portuguese securities.

The "contagion" that has been such a feature of the long-running euro crisis was also evident again, as concerns surrounded the price the Spanish government would have to pay the markets to take on its latest issue of €3bn in bonds, due on Thursday. Over the past two days the "risk premium" on Spanish and Portuguese government bonds over relatively secure German Bunds have reached their highest in months. Last week Portugal had to promise interest of 3.68 per cent, against the 2 per cent settled in September.

The German Finance Minister Wolfgang Schäuble said that Berlin was not urging any nation to seek help. The Spanish Economy Minister, Elena Salgado, added that its neighbour Portugal – the two Iberian economies have close links – did not need to apply for aid. The Portuguese president, Anibal Cavaco Silva, has declared that he does not intend to approach the European Financial Stability Fund for a loan.

However, such remarks have been deeply discounted because they were heard so often in previous episodes. A senior eurozone source was reported as saying that pressure was growing on Portugal from Germany, France, Finland and the Netherlands to seek help.

Some 55 per cent of UK exports go to the eurozone, so a fresh crisis there would have negative implications for the British economy.

In its last Financial Stability Report, the Bank of England said that the UK is "only partially isolated given the interconnectivness of European financial systems and the importance of their stability to global markets".