1:33 AM
By Dave Graham and Sergio Goncalves
BERLIN/LISBON | Fri Nov 26, 2010 4:25am EST
BERLIN/LISBON (Reuters) - Portugal is under pressure to follow Ireland's lead and seek a European bailout, a newspaper said on Friday, due to concerns Lisbon's debt woes could drag down Spain and trigger an even greater crisis.
The Financial Times Deutschland, which did not identify its sources, said some euro zone 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.
The German Finance Ministry could not immediately be reached for comment on the FT report which suggested that despite public displays of confidence, euro area leaders were alarmed at the prospect of the debt crisis engulfing ever more of its members.
Lisbon, which is preparing to pass an austere 2011 budget later on Friday that aims to deliver tough spending cuts to ward off a deeper debt crisis, issued an emphatic denial.
"This news article is completely false, it has no foundation," said a government spokesman.
A Reuters poll this week showed 34 out of 50 analysts surveyed believe Portugal will be forced to ask for help.
Spain has already passed its own austerity budget and only four out of 50 economists surveyed by Reuters thought Madrid would seek aid.
"Those who are taking short positions against Spain are going to be mistaken," Spanish Prime Minister Jose Luis Rodriguez Zapatero said on RAC1 radio on Friday.
A rescue aimed at meeting Spain's financing needs for 2-1/2 years would cost 420 billion euros ($557 billion) according to a Capital Economics estimate, the lion's share of the 440 billion euro European Financial Stability Facility (EFSF) reserve set up by the euro zone after the Greece bailout.
But two separate EU funds, augmented with International Monetary Fund backing, could provide loans worth 750 billion euros in total.
German Bundesbank chief Axel Weber, a powerful member of the European Central Bank's governing council, said this week 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.
A Spanish government source told Reuters that Madrid was not pushing Lisbon to seek help, underscoring splits within the 16-nation group on how to handle the debt and deficit crisis that has seen the euro fall sharply against the dollar since May.
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..
"I think Portugal has already crossed the point of no return. Its bond yield has gone beyond a sustainable level. The market is now watching whether Spain will need a rescue," said a Japanese bank foreign exchange trader.
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