Britain faces stumping up yet more bailout money as markets turn on weak European economies


  • Markets attack weaker economies in Spain, Portugal and Italy
  • Experts predict Portugal next and Britain will have to pay
  • Euro drops to three-month low after traders off load

Eurozone countries took a battering from the markets today raising fears Britain will have to stump up even more money for further bailouts.

The crisis showed no sign of abating with Spain bearing the brunt today when its borrowing costs hit record levels.

Portugal - thought to be the most likely country to need a rescue package next following Ireland's £72 billion handout - also voiced fresh concerns about an increased risk to its vulnerable banks.

Belgium and Italy were also victims.

Deputy Prime Minister Nick Clegg (left) and Prime Minister David Cameron (second right) listen as Chancellor George Osborne (centre) delivers his autumn statement in the House of Commons, London.

Deal: Chancellor George Osborne told MPs yesterday Britain would withdraw from the eurozone financial fund to bailout failing economies - but not until 2013

Although Chancellor George Osborne struck a deal with the other eurozone countries on Sunday to release Britain from any further financial bailouts the agreement does not start until 2013.

If teetering economies in Portugal, Spain or any other eurozone nation were to collapse before then a deal agreed by former chancellor Alistair Darling in the dying days of the Labour government would stand leaving British families pumping yet more money into failing economies.

As the pressure on the eurozone reached new levels experts said a period of calm that some hoped would follow Ireland's deal had not materialised and the markets had given the rescue the 'thumbs down'.

Portugal's Prime Minister Jose Socrates

Portugal's Prime Minister Jose Socrates faces asking the EU for financial help

Both the former and current chancellor would face an angry backlash if more money were to leave the British economy at a time when the country itself is far from safe from a 'double-dip' recession.

Today's heightened fears came when panicked markets turned their fire on weaker European nations - Spanish bond yields peaked at 5.6 per cent, Italy's yields spiked at a record 4.72 per cent and the euro sank under 1.30 dollars.

Spanish economic secretary José Manuel Campa said it would be a 'worry' if the current high financing costs for the nation's debt lingered.

The euro also fell briefly below $1.30 for the first time in almost three months as markets dumped the single currency.

Jose Manuel Campa

Crisis: José Manuel Campa called today's bond sell off a 'worry'

Jonathan Loynes, Capital Economics' chief European economist, said 'If Portugal were to require a bailout it would be much the same size as Ireland's and Greece's. But Spain and Italy are a very different prospect.

'If Spain needed a rescue package it would be a much different prospect - it remains to be seen if the eurozone countries would be willing, or even able, to fund Spain while it got back on its feet.

'But the problems in Spain are much different to those we have sen in the smaller economies - it does have a lots of work to do but any bailout would be some way off.

'The pressure is continuing to grow after the Ireland bailout which is something that did not happen after Greece. there was a period of calm then but now the markets are reacting differently.'

Lee Hardman, an analyst at The Bank of Tokyo-Mitsubishi UFJ, said: 'There appears plenty of scope for further euro downside from current levels as the eurozone debt crisis intensifies.'

Markets have given "a big thumbs down to the steps announced by the European authorities at the weekend' when Ireland's bailout was announced, Mr Hardman added.

'The poor bond market reaction is an indication that the market is worryingly losing confidence in the European authorities' ability to deal effectively with the eurozone sovereign debt crisis. It is much harder to regain confidence than lose it.'

EuroV£ graph

Euro versus Pound: The euro began to recover after the summer following the Greek bailout. But following recent turmoil in Ireland and fears over other European countries the single currency is struggling.

IF MORE BAILOUTS ARE NEED, WHERE IS THE MONEY?

The 16 euro zone countries have, in theory, 750 billion euros at their disposal to combat the crisis. Of the total, 250 billion comes from the IMF, 440 billion from euro zone governments and 60 billion from the 27-country EU.

So far, only about 60 billion has been disbursed -- in Dublin's package about 25 billion came from its own coffers and bilateral loans. Greece's bailout was a separate agreement.

With at least 650 billion euros still available, euro zone countries should be able to handle a bailout of Portugal and possibly even Spain, if Lisbon and Madrid request aid. In such an eventuality, technical teams could be dispatched within days and money could be released around a week to 10 days later.

In the scheme of sovereign bailouts, that is lightning quick, and when it comes to the European Union, the institutional wheels can seldom have moved so quickly.

But panicked investors, or speculators betting that Portugal, Spain and others may be forced to accept bailouts, can take decisions remotely and move billions of euros in seconds, applying almost instantaneous pressure.

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