Spain has rejected any suggestion that it might be the fourth eurozone member to seek an international bailout. After Portugal announced that it would need help, attention is focused on which country will be next.
Salgado insists that Spain won't need an EU bailout
The Spanish government on Thursday rejected the suggestion that it would be the next eurozone country to require an international bailout to help pay its debts.
Madrid’s efforts to reassure markets came after Portugal announced it would become the third EU member, after Greece and Ireland, to seek financial help.
Austerity measures have proved unpopular, prompting demonstrations
Spain is considered by many to be the next most likely candidate to need help, with Madrid struggling to bring down a public deficit that in 2009 reached 11.1 percent of gross domestic product.
However, Spanish Finance Minister Elena Salgado said the country, which has already introduced a raft of unpopular austerity measures, needed no help and was in no danger of "contagion."
"The possibility of contagion and a rescue for Spain is out of the question," Salgado told Spanish National Radio (RNE) on Thursday, pointing out that, until 2008, Spain had enjoyed a public budget surplus. "We have a history of surpluses and years of strong growth which is something that Portugal does not have," the minister said.
"For a long time now the markets have distinguished between Spain and Portugal. Our economy is more powerful, diverse and competitive than the Portuguese," added Salgado.
Austerity brings vote of confidence
Madrid has adopted a policy of stringent budget cuts and labor, pension and banking reforms in order to avert the threat of becoming the fourth eurozone domino to topple.
Spain was given a vote of confidence by the head of the Organization for Economic Co-operation (OECD) on Thursday. "Spain will not have the same problems as Portugal," said Angel Gurria at a meeting of finance ministers in Brussels. Gurria said that Madrid had been addressing its problems, which were "never the same" as those in Portugal, from some time.
European finance ministers were due to meet on Thursday for a relatively pressure-free discussion on the future of the fiscally challenged eurozone, but the proceedings have been dealt extra urgency by the Portuguese decision.
Portugal would lose some of its economic sovereignty to the EU
Ministers now face the difficult task of assessing how to appease unforgiving markets following this latest economic blow.
'In the national interest’
The Portuguese prime minister announced Lisbon's intention to apply for a bailout from the European Union in a televised address to the nation on Wednesday. "We must all assume our responsibility," said Prime Minister Jose Socrates.
"The Portuguese people know how to work in the national interest when it's needed and this is why - in the national interest - I tell the Portuguese people that it's time to take that step, so that we can have the best resources for the Portuguese people and for Portugal."
The news comes in the aftermath of the collapse of Portugal's government last week. Socrates called snap elections for June 5 after the country's parliament failed to pass austerity measures aimed at reducing its debt burden.
Should Lisbon apply for financial help, it would have to place its economy under the supervision of the International Monetary Fund, the European Central Bank and the European Commission.
Rise in European shares
Analysts have suggested that in excess of 65 billion euros ($92.8 billion) would be needed in order to cover Portugal's sovereign debt and recapitalize the banks.
However, the European stock market appeared to take the news in its stride on Thursday morning, reporting a 0.3 percent rise in the FTSEurofirst 300 index of top shares.
Socrates spoke of the need for a bailout in a televised address
Germany's deputy foreign minister suggested the initial market reaction is proof that Portugal's decision to seek financial aid may have averted the risk of other countries in the eurozone falling to the same fate.
"The first market reactions show that Portugal's decision was on the one hand expected and on the other hand regarded by the financial markets as a one-off, so there is no risk of a chain reaction," Werner Hoyer, of the Free Democrats (FDP) told Reuters.
If the government in Portugal had not acted, "within a few months the situation for Portugal and therefore also for the eurozone could have become very dangerous", he added.
Standard & Poor's last week reduced Portugal's credit worthiness to a rating of BBB-, just one notch above junk bond status. In turn, the interest rate on five-year bonds has risen to nearly 10 percent.
Author: Charlotte Chelsom-Pill, Spencer Kimball, Richard Connor (AFP, dpa, Reuters, AP)
Editor: Nicole Goebel