LISBON, Portugal (AP) - Europe's government debt crisis has flared up again in the run-up to a crucial meeting of EU leaders as Portugal had to pay 50 percent more to raise cash in the markets on Wednesday than it had to just six months ago.
Investor tensions grew after the Portuguese government revealed it is paying 5.99 percent interest to raise 1 billion ($1.4 billion) in two-year bonds. That was way above the 4 percent demanded at the last similar auction in September and around four and a half percentage points more than the rate Germany has to offer - even though the two countries share the same currency.
The yield on Portugal's ten-year bonds rose a further 0.06 percentage point to 7.68 percent, a euro-era record and above the rates Greece and Ireland saw before accepting bailouts from the EU and International Monetary Fund last year.
The major concern in the markets is that the March 25 summit of EU leaders in Brussels will not yield the "comprehensive solution" to the debt crisis that has been trumpeted. There's also a realization that higher borrowing costs will make it far more difficult for countries like Greece and Portugal to grow themselves out of the debt mire they find themselves in.
Though yields across the eurozone have headed higher since European Central Bank chief Jean-Claude Trichet last week said interest rates could be hiked in April, not all countries have seen borrowing costs rise at the same pace.
The difference between the cost of German and Portuguese ten-year bonds has widened, reflecting fears that Portugal will end up having to get bailed out.
"The recent re-widening also reflects an easing in the market's initial optimism surrounding the unveiling of the much anticipated comprehensive package from the European authorities in the month ahead," said Lee Hardman, a currency economist at The Bank of Tokyo-Mitsubishi UFJ.
The deterioration in sentiment was reflected in the euro. On Monday it jumped above $1.40 for the first time since November in the wake of Trichet's hint that eurozone interest rates will likely to rise next month. It has drifted lower since the, however, due to renewed tensions over Portugal's financial situation.
By late morning London time on Wednesday, the euro was flat at $1.39.
For much of the last month, investors have been distracted from the debt crisis by rising inflation and the political upheaveal in North Africa, particularly Libya.
They also appeared positioned into believing that the eurozone will agree on a revamped bailout mechanism, set new rules on budget deficits and a system of support funds to flow from richer countries in the single currency bloc to the poorest.
However, the mood ahead of the meeting has been contradictory. There are signs that Greece and Ireland are going to find it difficult to renegotiate their rescue deals. The two countries are hoping that the interest rates on their respective loans will be lowered and that they will both have a longer time to pay them back.
Meanwhile, Greece suffered what it termed a "completely unjustified" ratings cut from Moody's Investor Services, prompting a further spike up in its borrowing costs to new euro-era highs.
Pylas contributed from London.