* Bonds spreads, yields rise sharply
* Government says doing what needed, blames speculation
* Analysts say 2011 budget almost certain to be approved
(Adds analysts, details, byline)
By Sergio Goncalves
LISBON, Nov 4 (Reuters) - Portugal’s government has no plans to resort to financial aid from overseas despite a sharp rise in borrowing costs, which have been propped up by Ireland’s woes and market speculation, a senior minister said on Thursday.
Cabinet Minister Pedro Silva Pereira told reporters after a cabinet meeting the austerity measures in the 2011 budget bill are credible and adequate to restore market confidence.
He said the government “excluded a scenario of resorting to international instruments to support financing for the Portuguese economy, because our message is exactly the opposite: Portugal is doing its bit”.
“There is a speculative dimension of that development (rise in yields) that has no rationality in relation to the budget consolidation measures,” he said, adding that Portugal has been affected by the situation in Ireland, which is widely seen as the next weak link in the euro zone after Greece.
Portugal’s parliament on Wednesday approved general guidelines of the budget bill, clearing another hurdle for a fiscal programme that aims to sharply cut the deficit and soothe investor concerns over the country’s finances, but bond yields spiked again on Thursday. [Id:nLDE6A31SO] [Id:nLDE6A22GU]
The premium investors demand to hold 10-year Portuguese government bonds rather than German Bunds rose by about 31 basis points to 431 bps PT10YT=TWEBDE10YT=TWEB.
Five-year credit default swaps (CDS) on Portuguese government debt rose by 26 bps to 450 bps and were just 11 bps shy of matching their record high struck in May, while Ireland’s equivalent CDS rose by 42 basis points on the day to a record high of 600 bps according to CDS monitor Markit.
Some traders said investors feared Ireland and Portugal may fail to approve their respective budgets by year-end, but analysts in Portugal say last week’s agreement between the main opposition Social Democrats (PSD) and the government will be honoured in the final vote on Nov. 26.
“After the PSD committed itself to allowing the budget’s passage in the first vote, it is absolutely unthinkable that it won’t be approved in the end,” said Antonio Costa Pinto, a political scientist at the University of Lisbon.
“There may be some tensions over the bill’s details and the usual political wrangling, which the market doesn’t seem to like, but the budget is approved,” he added.
Finance Minister Fernando Teixeira dos Santos has said previously borrowing costs above 7 percent could force the country to seek financing from the EU and International Monetary Fund — following in the footsteps of Greece.
In May, Greece agreed with the European Commission, the European Central Bank and the IMF to implement an economic policy programme in exchange for 110 billion euros in emergency funding to avoid default.
The yield on Portuguese benchmark 10-year bonds was above 6.7 percent on Thursday, while that on Ireland’s equivalent was at 7.8 percent.
Debt premiums of peripheral euro zone issuers have been under heavy pressure after Friday’s European Union proposals on sovereign debt restructuring raised the possibility of bondholders having to share the burden in a default.
“The main underlying concern (in the market) is the proposed bailout mechanism, which is driving risk-averse investors away,” said Orlando Green, debt strategist at Credit Agricole in London.
“The situation in Ireland is another concern, as are other event risks on the horizon in the periphery like a by-election in Ireland and local elections in Greece,” he added.
For an analysis of the budget deal click on [ID:nLDE6A00Z]
For key details of the draft budget [ID:nLDE69C26Q]
Additional reporting by Shrikesh Laxmidas and Andrei Khalip, writing by Andrei Khalip, editing by Stephen Nisbet
