* Portuguese yields top 8 percent
* Cost of insuring Portuguese debt against default soars
* Sell-off spreads to Italian, Spanish and Irish markets
By Ana Nicolaci da Costa
LONDON, July 3 Portuguese borrowing costs surged
on Wednesday as rising political tension in the bailed-out
country prompted investors to dump riskier assets on concerns
the euro zone debt crisis could be set to flare again.
The resignation of two key ministers, including Finance
Minister Vitor Gaspar who was the architect of its austerity
programme, tipped Portugal into a crisis that could derail its
plan to exit its bailout next year.
Portuguese bond yields surged to levels near which it was
forced to seek international aid two years ago. The sell-off
spread to other riskier markets like Italian and Spanish debt
and European equities.
Short-dated borrowing costs rose faster than longer-dated
ones and the cost of insuring Portuguese debt against default
soared, suggesting growing concern about Lisbon's ability to
service its debt.
"This could quickly bring Portugal into a situation where
there will have to be decisions about whether there is another
extension of the support programme," Elwin de Groot, senior
market economist at Rabobank said.
"It will also bring back discussion on whether the ECB has
any interest in trying to prevent further increases in
Portuguese yields and whether or not it will be willing to do
Ten-year Portuguese government bond yields
surged to 8.2 percent - their highest since November 2012, while
two-year yields jumped 185 basis points to 5.47 percent.
Spanish, Italian and Irish borrowing costs also rose sharply
but stayed below 5 percent. Ten-year Spanish yields
rose 14 bps to 4.71 percent and the Italian
equivalent jumped 13 bps to 4.54 percent.
Analysts remained relatively sanguine about the long-term
impact of Portugal's political crisis on the region at large,
arguing even a change in government - if it came to that - was
unlikely to derail Portugal from its austerity path. They also
said Spain and Italy were relatively insulated by the European
Central Bank's conditional bond-buying promise.
"The risk for a dramatic change in economic policy is very
limited," Patrick Jacq, European rate strategist at BNP Paribas
said. "I don't think that this will lead to significant,
persistent strong pressures on peripherals and back to a crisis
But higher borrowing costs for longer could hurt Portugal's
chances of exiting its bailout without further support and could
make markets more prone to testing the ECB's resolve.
Bond markets have stabilised over the past year after the
ECB backstop brought borrowing costs across peripheral markets
down sharply, but the programme has never been activated.
As the political crisis in Portugal unfolds, analysts say
the way euro zone officials deal with the latest flare-up in the
currency bloc could be key to whether contagion spreads or is
Against this backdrop, investors will scour ECB President
Mario Draghi's news conference after a monetary policy meeting
on Thursday for reassurances that the ECB has the region's back.
"Portugal looks very wobbly ... we think there is a highly
increased (chance) of second bailout being required," one trader
said. "High-beta periphery is back in focus. Presumably this
means the ECB is going to be dovish tomorrow."