A decision by Ireland to seek foreign aid would sharply raise the pressure on Portugal to do the same as the last of the euro zone's small and exposed economies battles chronically low growth and a high deficit.
Ireland's debt woes helped drive Portuguese risk premiums to euro lifetime highs last week, and analysts say pressure will intensify if Dublin does finally ask for emergency aid from the European Union.
While Portugal's debts and deficit are much lower than Ireland's, and its banks have not suffered from the bursting of a housing bubble, analysts stress Lisbon's inability to generate strong growth since it joined the euro makes it vulnerable.
Portugal's funding costs for now remain much lower than Ireland's, reflecting Lisbon's stronger credentials — its budget deficit is expected at 7.3 percent of gross domestic product this year compared with Dublin's 12 percent.
But at roughly 6.8 percent, Portuguese 10-year yields are still within sight of the 8-percent plus rates which economists say will now likely tip the boat for Dublin.
"If Ireland goes (to seek aid), there will be pressure on Portugal, although I'm not quite sure Ireland is going to seek help," said Anke Richter, credit research director at Conduit Capital Markets in London.
Analysts point out that at least on the political front Portugal has won time with an agreement last month between the minority Socialist government and opposition Social Democrats to pass an austere 2011 budget in parliament.
The budget was passed in its first reading in parliament on Nov. 3. Concern over the ability of the government to pass the budget weighed on Portugal in October and threatened a political crisis as the government rules without a majority in parliament.
While short-term political concerns have subdued, Foreign Minister Luis Amado warned this weekend that failure to form a coalition government to overcome the crisis could push Portugal out of the euro.
Finance Minister Fernando Teixeira dos Santos said on Monday there were no plans to seek foreign aid.
The government's budget, which includes 5 percent cuts to civil servant wages and a rise in value-added tax to 23 percent from 21 percent, should deliver a sharp fall in next year's budget deficit to 4.6 percent of GDP.
But the key question, analysts say, is how Portugal can grow in coming years with increasing austerity.
Unlike the other peripheral euro zone economies in the run up to the financial crisis, Portugal has had one of the EU's lowest growth rates.
"Ireland is close to the point of no return and Portugal is, after Ireland and Greece, the third country in the euro zone with the most problems, essentially due to its foreign debt," said Rui Barbara, an economist at Carregosa Bank.
"With debts as high as ours, as much as the government cuts its expenses, the more important question is growth," he said, adding that if bond yields remain above 6 percent until the end of this year it would be hard for Portugal not to seek EU aid.
Portugal's government debt is around 82 percent of gross domestic product, much below Greece's 130 percent and Ireland's near 100 percent, but analysts say that adding corporate and private debt burden, the total rises to an alarming rate over 250 percent.
This may prove to be an additional strain on Portuguese banks that have relied heavily on ECB loans of late — another similarity to Ireland.
Economic growth this year has so far surprised on the upside, with an expansion of 1.5 percent in the third quarter from a year earlier.
But with Portugal now enacting tough austerity, many economists think the country will slide back into recession next year.
The government projects growth of 0.2 percent in 2011, a projection many economists say is overly-optimistic.
"You can have the toughest budget, but if you can't get the economy growing you can't really tackle your debt," said Richter.
In a research report titled 'Is Portugal Next?', UBS said the pressure on both Portugal and Ireland to seek external support is increasing.
"Although the move of (Portuguese) spreads has been less extreme than in the case of Ireland, the situation is arguably not much better," UBS said.
Still, other economists say there are big differences between Portugal and Ireland which markets are not sufficiently reflecting.
Peter Nabney, ING country manager for Portugal, wrote in the Financial Times on Friday that Ireland's troubles stem from the Irish banking sector's lending to the property sector and the subsequent bust in housing.
"Portugal's plight is a creeping loss of competitiveness, but as this has evolved against a backdrop of sluggish economic growth, the country's institutions remain sound," Nabney wrote.
Portugal joined the euro at what many see as an overinflated rate that undermined local business for the longer-term.
Some economists suggest average wages in Portugal have to be cut by 10 percent for the economy to regain competitiveness.
But the simple association of Portugal with the other peripheral euro zone countries is making it increasingly tough for the Iberian country to distance itself from them.
ING's Nabney said he fails to see the similarities between Ireland and Portugal.
"However, as we know too well, if Ireland has to request support the market will move on to the next vulnerable victim, a process that has already begun," he wrote.
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