5:50 AM
By William James and Jan Strupczewski
LONDON/BRUSSELS | Mon Jan 10, 2011 7:52am EST
LONDON/BRUSSELS (Reuters) - The European Central Bank threw Portugal a temporary lifeline on Monday by buying up its bonds, traders said, as market and peer pressure mounted for Lisbon to seek an international bailout soon.
A senior euro zone source told Reuters on Sunday that Germany, France and other euro zone countries were pushing Portugal to seek an EU-IMF assistance program, following Greece and Ireland, in a bid to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area.
The interest rate premium on Portuguese sovereign debt fell on Monday after rising sharply late last week as traders said the ECB intervened to buy government bonds on the secondary market.
"They're buying five-years and 10-years in Portugal, whatever people are offering really," one trader said.
Another trader said the ECB appeared to be buying Greek and Irish bonds too. EU sources say the central bank has not yet bought Spanish government debt.
The euro zone source said Lisbon would need between 50 billion and 100 billion euros ($64.5-$129.1 billion) in loans, similar to Ireland, which accepted an 80 billion euro EU-IMF rescue in December after a banking crisis caused by a burst real estate bubble lumbered the state with huge liabilities.
"LITTLE CHANCE OF ESCAPING"
German Finance Minister Wolfgang Schaeuble denied that Berlin was pushing anyone to seek assistance, but he said it was defending the euro.
Spanish Economy Minister Elena Salgado said Portugal did not need to apply for aid because it was meeting its commitments to reduce its budget deficit. And the European Commission said no discussion was currently under way on assistance for Portugal or any other country.
But economists and market analysts said it was widely regarded as only a matter of time before high-deficit Portugal, with a stagnant economy that has lost competitiveness since joining the euro area, had to seek aid.
"If market spreads keep rising, Portugal has little chance of escaping a bailout," said Laurence Boone, research director at Barclays Capital in Paris.
Deutsche Bank economists Gilles Moec and Marco Stringa said in note that the Lisbon government would have to significantly "over-issue" debt in the first four months to avoid a sharp deterioration in its cash position while Portuguese banks will face a peak in their refinancing needs in January and February.
"It would be rational for Portugal to call for external help sooner rather than later," they said.
European finance ministers are due to consider a more comprehensive response to the continuing debt crisis at their next monthly meeting on January 17-18.
A German Finance Ministry spokeswoman said Portugal was not on the agenda, but the euro zone source said informal exploratory talks had already begun.
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