Portugal is under pressure to seek a European bailout due to concerns Lisbon’s debt woes could drag down Spain and trigger an even greater crisis.
The Financial Times Deutschland said some states wanted Portugal to seek aid in order to avoid Spain, the fifth largest EU economy, from having to follow suit.
“If Portugal were to use the fund, it would be good for Spain, because the country is heavily exposed to Portugal,” the FT Deutschland quoted a source in Germany’s finance ministry as saying.
“This news article is completely false, it has no foundation,” said a government spokesman.
A recent Reuters poll shows 34 out of 50 analysts surveyed believe Portugal will be forced to ask for help.
A rescue aimed at meeting Spain’s financing needs for two and a half years would cost €420bn according to a Capital Economics estimate, the lion’s share of the €440bn European Financial Stability Facility (EFSF) reserve set up by the eurozone after the Greece bailout.
But two separate EU funds, augmented with IMF backing, could provide loans worth €750bn in total.
German Bundesbank chief Axel Weber, a powerful member of the ECB’s governing council, said that the EFSF and other EU rescue funds had enough money, if needed, to cover the borrowing needs of stretched euro zone members Greece, Ireland, Portugal and Spain.
Markets are still acutely worried by the threat of debt crises in Greece and Ireland spreading further and have pushed the borrowing costs of Portugal and Spain to record highs.
Top EU officials have stressed that there was no risk of the eurozone breaking up after Ireland caved into pressure and requested a bailout.
Angela Merkel, who unsettled markets by her comment that the euro was in an “exceptionally serious” situation, said she was confident the euro area would emerge stronger from the crisis.
The chairman of eurozone finance ministers, Jean-Claude Juncker said in an interview he was not worried.
And Klaus Regling, chief of the euro’s financial safety net, was even more emphatic when asked by German daily Bild about the risk of the euro area falling apart: “There is zero danger. It is inconceivable that the euro fails.”
Merkel agreed with Nicolas Sarkozy that the mechanism set up to protect the euro should not be changed before it expires in mid-2013 – another attempt to convince spooked investors they would not be made to share the cost of any sovereign default before then.
German proposals for “haircuts” for bond holders have raised peripheral eurozone states’ borrowing costs yet higher.
In another effort to shore up confidence, ECB policymakers brushed off the flare-up in debt market turmoil and said the bank’s plans to scale back its crisis support remained on track.
Greece received a three-year €110bn EU/IMF bailout in May, leading to the creation of the EFSF, which Ireland has now applied to tap to cope with the enormous cost of bailing out its banks.
The Irish government said it was confident it would be able to pass the toughest budget in the country’s history to meet the terms of an EU/IMF rescue under negotiation.
PM Brian Cowen’s €15bn in spending cuts and tax increases unveiled will form the basis for an IMF/EU rescue package worth about €85bn. But the plan failed to impress markets amid doubts the fragile coalition will be able to push it through.