CORRECTED – WRAPUP 2-Portugal pays heavily to borrow, S&P cuts Ireland

(Corrects fifth paragraph, removing extraneous word)

* Portugal short-term borrowing costs hit 5.8 percent

* S&P cuts Irish rating, Fitch may follow suit

* Economists see even lower Irish growth

* Bailout remains on for Portugal, Spain seen sheltered

By Andrei Khalip and Carmel Crimmins

LISBON/DUBLIN, April 1 (Reuters) – A successful Portuguese
debt sale on Friday did little to cull expectations it will soon
join the euro zone bailout list, while Ireland’s credit rating
was cut after bank stress tests revealed another black hole.

Portugal sold 1.645 billion euros of short-dated bonds, but
had to offer an interest rate of 5.79 percent, lower than other
current market rates but 2.5 percentage points more than it paid
at auctions of similar bonds last year. [ID:nLDE7300QU]

The result means Lisbon is now having to pay a higher
interest rate to borrow money for the next 15 months than Spain
is paying to raise funds for 10 years — a clear indication of
how much risk investors now attach to Portugal.

Portugal’s 10-year bond yields went on rising despite the
smooth auction, hitting 8.77 percent, up more than a percentage
point in the past week. Ireland’s reached 10.1 percent, nearly
6.5 percentage points higher than benchmark German Bunds.

Richard McGuire, a debt strategist at Rabobank, said that
while Friday’s auction showed Lisbon could still tap the markets
if needed, the trend was bleak.

“(Portugal) is fundamentally insolvent — i.e. it is clearly
in a situation where debt will have to be issued to cover
servicing costs, thereby resulting in a snowballing of
liabilities,” he said.

Standard & Poor’s stripped Ireland of its last ‘A’ rating
but the one notch cut and stable outlook was less severe than
feared and it gave the thumbs up to stress tests which on
Thursday showed its four troubled banks needed a further 24
billion euros to be properly capitalised. [ID:nLDE72T20R]

S&P, whose rubbishing of a previous “final bill” for
Ireland’s banking sector sent the country’s debt crisis into
overdrive last year, said the assumptions underlying the latest
round of tests were robust.

But rival agency Fitch took the shine off S&P’s modest
downgrade when it warned it could cut its BBB+ rating on the
back of weaker growth and a jump in the bank bailout costs.

A Reuters poll of economists found a consensus forecast of
just 0.5 percent growth in Ireland this year, well below the
official forecast of 1.7 percent and weaker than the 0.9 percent
pencilled in by the European Commission and IMF.

Underscoring the tenuous nature of Portugal’s finances, the
statistics agency had to restate the 2010 budget deficit on
Thursday, increasing the shortfall to 8.6 percent of gross
domestic product from 7.3 percent. [ID:nLDE72U17E]

The adjustment was down to methodology and will not affect
2011 figures, but still undermines broader confidence.

Financial markets are convinced Lisbon will have to ask the
European Union and International Monetary Fund for a bailout,
but Portuguese leaders are adamantly opposed. Credit ratings
agencies have already downgraded Portugal. [ID:nWLA6919]

Caretaker Portuguese Prime Minister Jose Socrates, who
resigned last week after parliament rejected his latest spending
cuts, has made it a point of honour not to accept EU/IMF help
and is likely to hold that line until new elections.

Portugal’s president dissolved parliament on Thursday and
set June 5 as the date for the next polls, meaning the country
is effectively in limbo for two more months.

While Portugal can probably go on funding itself for the
next eight weeks — it has to refinance 4.3 billion euros ($6.1
billion) of debt in April and 4.9 billion in June — the cost of
doing so is likely to go on being punitively high.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Stories on Portugal's debt crisis: [ID:nLDE68T0MG] Euro zone struggles with debt: Interactive timeline on crisis: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>


The debt crisis in the euro zone has already consumed Greece
and Ireland and shows few signs of relenting.

Greece, which agreed 110 billion euros of bilateral loans
with the EU and IMF last May, is making efforts to cut spending
and increase revenue to overhaul its economy, but questions
remain about whether it can get on top of its finances.

The 24 billion euros extra bank bill for Ireland, which
received an 85 billion euro package of aid from the EU and IMF
in November, was in line with market expectations and, coupled
with the European Central Bank’s decision to suspend collateral
requirements for loans from Ireland, gave the Irish banking
sector a lift on Friday. [ID:nLDE7300KK] [ID:nLDE72U1QQ]

The European Commission said it believed the stress tests
had been “extremely rigorous” and that there should now be no
more surprises lurking for the financial markets.

But Ireland still has accumulated bank liabilities of nearly
45 percent of GDP and will have total debts of well over 100
percent of GDP if forecasts from the stress tests are right.

If the European Central Bank raises interest rates next week
as expected, the impact on growth and debts will be even

Portugal finds itself in a similar conundrum. Its economy is
forecast to contract by around 1.0 percent this year, according
to the latest European Commission forecasts. As a result, the
debt-to-GDP ratio will climb without the debt increasing.

Spain, though, continues to look as if it has done enough to
stave off the pressure from financial markets.

While Spain shares many of the features of Ireland and
Portugal — high deficit, high public sector debt, structural
banking issues — it has bitten the bullet on making spending
cuts and retooling its economy.

“Resilience in the Spanish macroeconomic performance since
the summer of 2010, in spite of painful fiscal consolidation and
very elevated unemployment, is likely into the next few years,”
Deutsche Bank said in an economic report.

“This country should be able to deliver a positive, albeit
slow, growth rate consistent with a sustainable path for public
debt,” it said.
(Additional reporting by Sergio Goncalves and Shrikesh
Laxmidas in Lisbon, and by Charlie Dunmore in Brussels; writing
by Luke Baker, editing by Mike Peacock)

CORRECTED – WRAPUP 2-Portugal pays heavily to borrow, S&P cuts Ireland