Spain rejects contagion risk from Portuguese debt crisis

• Spanish economy minister says there is no risk of contagion • UK could contribute more than £3bn to help Portugal • Jose Sócrates says: ‘This is an especially grave moment for our country’ Spain has insisted it will not become the next victim of the eurozone debt crisis after Portugal finally bowed to widespread pressure on Wednesday night and joined Greece and Ireland in requesting a European Union bailout . Attention turned to Spain as investors questioned whether Portugal’s decision to seek help would bring calm to Europe or help to drag Madrid into the mire. Elena Salgado, the Spanish economy minister, said on Thursday morning that the risk of contagion “is absolutely ruled out… it has been some time since the markets have known that our economy is much more competitive”. Spain is widely seen as the most likely potential candidate for a bailout now Portugal has bowed to the inevitable by saying it needs help . The bailout is expected to total €70bn-80bn (£61bn-70bn) with Britain possibly being forced to contribute more than £3bn, according to the Open Europe thinktank. José Sócrates, the Portuguese prime minister, requested a European Union bailout on Wednesday night after a decade in which increases in borrowing far outstripped economic growth, pushing the country’s borrowing costs to untenable levels. Gary Jenkins, head of fixed income research of Evolution Securities, saud: “The market may turn its attention to Spain. The concern is that they do have a lot of debt to issue and that it would only take a short-term loss of investor confidence for Spain to face real problems.” David Blanchflower, a former Bank of England policymaker, told Bloomberg News that Portugal’s bailout could fuel Europe’s sovereign debt crisis. “This could be another big mistake because then the crosshairs move to Spain,” he said. The probability of Spain needing to be rescued “took a big jump upwards” after Portugal asked for a bailout, Blanchflower added. Spain, where more than a fifth of the population is unemployed, cut its 2012 growth forecast from 2.5% to 2.3% – and its 2013 prediction from 2.7% to 2.4% – on Wednesday ahead of an expected 0.25% rise in the Eurozone’s interest rate on Thursday afternoon. Many economists believe these forecasts could still be optimistic. Salgado insisted that such an interest rate increase would not endanger Spain’s economy, which exited an 18-month recession at the start of 2009 but has performed weakly since then, amid harsh public spending cuts. “The impact of a small rise in rates is very slow. Mortgages [in Spain] are only revised once a year and so the transmission [of a rate rise] is not immediate,” she said. Portuguese rescue plan welcomed Portugal requested the bailout just hours after a €1bn bond auction that had cost the country more than the rates likely to be demanded as part of an International Monetary Fund or EU rescue package. The bonds, providing funds for only six months and a year, were sold to investors, but at interest rates of more than 5% and nearly 6% respectively. A month ago, the cost of six-month money was less than 3%, and two weeks ago the government had been able to sell 12-month bonds at 4.3%. The move was widely welcomed. Erik Nielsen, chief European economist at Goldman Sachs, said: “This is good news. We’ve been saying for a while that Portugal’s finances were not sustainable at these rates.” In a televised address on Wednesday night, Sócrates said: “I want to inform the Portuguese that the government decided today to ask … for financial help to ensure financing for our country, for our financial system and for our economy.” “This is an especially grave moment for our country,” he added. “Things will only get worse if nothing’s done.” Sócrates said the bailout was “the last resort”. The move was immediately hailed in Brussels. “This is a responsible move by the Portuguese government for the sake of economic stability in the country and in Europe,” the European commission’s economic and monetary affairs commissioner, Olli Rehn, told Reuters. Sócrates did not say how much aid Portugal had requested but promised to negotiate the best possible conditions. Analysts said Portugal was expected to need up to €80bn, an amount that can easily be covered by the EU’s bailout fund, the European financial stability facility. The European commission’s president, José Manuel Barroso, promised a swift response. Portugal’s troubles differ from Ireland, which pledged to cover huge losses at its banks, and Greece, which lied about its debt. Instead, it had allowed debt to mushroom during a decade in which its economy grew at just 0.7% a year. Portugal admitted last week that the 2010 budget deficit had been 8.6% of gross domestic product, far above its 7.3% target. Portugal Europe European debt crisis Europe European Union Global economy Economics Spain Tom Bawden Giles Tremlett guardian.co.uk

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