European jitters anew as Spain, Portugal face default

LONDON - The debt crisis in Europe escalated sharply Friday as investors dumped Spanish and Portuguese bonds in panicked selling, substantially heightening the prospect that one or both countries may need to join troubled Ireland and Greece in soliciting international bailouts.

The draining confidence in Western Europe's weakest economies threatened to upend bond markets, destabilize the euro and drag out the global economic recovery if it is not quickly contained. It also underscored the mounting problems facing countries that during the past decade have both over-borrowed and overspent, and are now in danger of losing investor faith in their ability to make good on their massive piles of debt.

The perceived risk of debt defaults in Portugal and Spain drove their borrowing costs to new highs Friday, with the interest rate demanded on Portuguese bonds soaring to a point where it could effectively cut the Lisbon government off from raising fresh cash to run the country.

As a result, Portugal was coming under pressure to immediately request a bailout from the European Union and International Monetary Fund. Officials in Lisbon responded by pushing through a painful round of budget cuts meant to reassure investors and rejected claims that they needed an emergency lifeline. Italian and Belgian borrowing costs also rose Friday.

The bigger fears, however, surrounded eroding confidence in Spain, whose faltering economy is more than twice the size of the Greek, Irish and Portuguese economies combined - meaning that a bailout there could run into the hundreds of billions of dollars.

Coupled with the pending bailout for Ireland and possibility Portugal, analysts said, a Spanish rescue could severely deplete the $1 trillion stability fund set up by the European Union and International Monetary Fund to contain the crisis.

The crisis could also send the euro plunging against the dollar, making the greenback stronger on world markets and undermining the efforts of the Obama administration to boost U.S. exports overseas.