Although the focus of Europe's sovereign debt crisis has shifted from Ireland to the Iberian Peninsula, Portugal, with its spiralling budget deficit and sluggish economic growth is on a denial mode for any European Union-led rescue package to shore up the nation's struggling economy.

The prime minister Jose Socrates stressed that the country did not need an international aid, and is aiming to cut this year's budget deficit to 7.3 per cent of gross domestic product from 9.3 per cent in 2009, and further targeting to reduce it to 4.6 per cent in 2011, below the expected average for the EU.

Last week, the Portuguese parliament adopted an austerity budget for 2011, in its efforts to rein the crisis and avoid a potential bailout similar to that of Greece and Ireland. (See: Irish crisis forces Portugal to adopt austerity budget for 2011)

As part of its efforts to contain the budget deficit, the government yesterday agreed to let Portugal Telecom, the country's largest telecom company, transfer its €2.8 billion pension fund to the government treasury.

The fund is valued at approximately 1.6 per cent of the nation's gross domestic product. In return, the government will assume the telecom company's pension liabilities.
Portugal Telecom will pay the difference between the amount currently in the fund and its present liabilities, which amount to around €1 billion, in three instalments from December 2010 to December 2012.

On Wednesday, the government has successfully issued €500-million worth of bonds, but the yields were higher than that for the previous issue.

The one-year treasury bills were oversubscribed 2.5 times, showing healthy demand, which is a positive indication.

Nevertheless, the average yield was nearly 10 per cent up at 5.3 per cent compared to the November 2010 auction's average of 4.8 per cent, which observers see as a sign of increasing stress in the euro zone.

The government's proposed austerity plan includes a 5-per cent pay cut to government employees and a 2-per cent increase in value added tax rate to 23 per cent.

''I do not see any reason to change the position of the Portuguese government which is very clear. We do not need any help, what we need is confidence in the Portuguese economy,'' Socrates said in an interview on Portuguese radio.

Although Portuguese unions are not pleased with the proposed austerity plans, they have decided against a head on confrontation, but discuss their concerns with the government.

Nevertheless, investors are worried that Portugal is the next in the spotlight for a bailout, along with Spain, Belgium, and even Italy. On Wednesday, the rating agency Standard & Poor's said that it might downgrade the country's credit rating.

In its Autumn report released earlier this week, the European Commission (EC) projected  Portugal's growth at 1.25 per cent for the current year, which would fall into negative territory next year, to about -1 per cent, before returning to positive growth of 0.75 per cent in 2012.

Risks to the outlook remain, with unemployment rising from 9.6 per cent last year to 10.5 per cent in 2010 and 11.1 per cent in 2011, the commission said.

Mark O'Sullivan, director of Dealing at Currencies Direct, comments, ''As with Ireland, public government denials do very little to calm the markets, it's the bond markets that reveal all and as confidence fades away and yields rise, a bailout becomes inevitable - you cannot outrun the markets.''

After weeks of denial for a bailout, Ireland last week resorted to a multi-billion euro rescue package by the EU and IMF. (See: Ireland succumbs to EU, IMF on €85-bn bailout).