EU seals debt crisis plan amid Portugal woes

BRUSSELS – Portugal’s slide toward a financial rescue vexed the European Union’s efforts Friday to stamp out its government debt crisis with deals on a permanent bailout fund and new rules on how euro countries run their economies.

The bailout fund prevents a government from having to default or restructure its debts. That could shake up financial markets, hurt already fragile banks that hold government bonds, and make investors more reluctant to lend to governments in the future.

EU leaders praised their “comprehensive package” aimed at calming markets and fixing some of the euro’s vulnerabilities, but even as they did Portugal’s 10-year bond yields rose to 7.80 percent, a record high that shows investors fear the country might not be able to pay off debts that are coming due.

Portuguese officials have said those rates make it too expensive for them to borrow — and they will need to tap bond markets soon.

A top European Union official said the EU had the financial muscle to rescue Portugal. It has already bailed out Greece and Ireland, where troubled government finances led to their governments being effectively cut off from further bond borrowing and needing help to avoid default.

“If Portugal asks for help, then it would be assumed that this would happen shortly, and in that case the rescue shield would be enough,” said Jean-Claude Juncker, the prime minister of Luxembourg and the main spokesman for the group of countries that use the euro.

Portugal’s crisis took some of the shine off a two-day EU summit where leaders put the final touches on an agreement to set up a permanent, 500-billion euro($706 billion) bailout fund to replace the temporary one that expires in 2013.

They also signed off on new rules for closer economic cooperation to limit debt, improve growth and prevent more crises and boosted the temporary bailout fund so it can lend its full 440-billion euro ($622 billion) allotment, instead of keeping some of that as reserves to ensure a top bond rating. Countries bailed out after 2013, meanwhile, will get lower interest rates on emergency loans.

They had hoped that those moves, mostly agreed in past weeks and being sealed Friday in their summit statement, would represent a “comprehensive package” that would help calm the turmoil on the bond markets.

“Europe has done exactly what we needed to do,” French President Nicolas Sarkozy said, praising plans to coordinate the eurozone’s economies more closely. “I don’t see really at this stage what we could do more, which doesn’t mean that in a few months from now we won’t have new ideas up our sleeve.”

Market prices suggested investors are now less afraid the debt turmoil will spread. The yield on Spanish 10-year government bonds, for example, was down another 0.05 of a percentage point at 5.11 percent, easing pressure on what many consider the next weakest link in the eurozone.

Yet Portugal’s troubles were another example of the crisis overtaking official efforts to drive a stake through its heart for good. It first started with news that Greece’s deficit was much larger than reported in late 2009, and flared and eased through 2010 with bailouts for Greece in May and Ireland in December.