Ailing Portugal's bond yields hit record highs (AP)

LISBON, Portugal ? The yield on Portuguese bonds in the secondary market climbed to euro-era records Wednesday amid market fears that the bailed-out country won't be able to break free of its financial crisis in the near future.

The yield on 3-year bonds reached 19.4 percent Wednesday. The rate on 5-year bonds was 18.7 percent and on 10-year bonds was 14.6 percent.

Portugal needed a euro78 billion ($101 billion) rescue package last year as its high debt load and feeble growth pushed it towards bankruptcy. A three-year program of austerity measures and economic reforms is aimed at restoring investor confidence in the eurozone country, but a deepening recession, with a 3.1 percent contraction forecast for this year, is undermining market faith in Portugal.

Standard & Poor's recently joined the two other major ratings agencies Fitch and Moody's in downgrading Portuguese debt to junk status.

Officials have also expressed fears of contagion from Greece's ongoing debt woes.

Antonio Barroso, an analyst with Eurasia group, said in a note Wednesday that the recent downgrade and Greece's troubles "are increasing the perception that Portugal might not be able to avoid a default."

However, given Portugal's commitment to restoring fiscal health, he said, "it is likely that the government might have an easier time negotiating a new rescue package than Greece."

The prime ministers of Portugal and Spain have appealed for next week's European Union summit to takes steps that will help protect them against a knock-on effect from Athens, where a potential default would have repercussions across the entire 17-nation bloc and beyond.

Spanish Prime Minister Mariano Rajoy said at a joint news conference with Portuguese Prime Minister Pedro Passos Coelho late Tuesday that Greece's difficulties could thwart the Iberian countries' efforts to cut debt and foster growth.

Athens is locked in tough negotiations with investors on a debt swap deal.

The Portuguese government has repeatedly rejected speculation it might try to renegotiate its bailout deal.

Source: http://us.rd.yahoo.com/dailynews/rss/eurobiz/*http%3A//news.yahoo.com/s/ap/20120125/ap_on_bi_ge/eu_portugal_financial_crisis

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