Portugal has denied rumours that it is close to accepting a bail-out package, despite the emergence of a damaging split at its central bank.
Days of speculation that Portugal is under pressure to accept help have raised alarm that the euro zone may be lurching into a new phase of crisis.
Portugal, widely seen at risk of being the next euro zone country to need rescuing after Greece and Ireland, intends to make a critical issue of debt tomorrow and has seen rates it has to pay rise sharply. Analysts said the government was trying to 'delay the inevitable'.
Portugal suffered a fresh blow when the central bank said it would suffer a 1.3% recession this year, downgrading a previous outlook of zero growth.
'All the rumours on the IMF and on external assistance are speculation which does not help, which harms the interests of the country and aggravates market conditions,' Prime Minister Jose Socrates said. Socrates said that Portugal's public deficit for 2010 was 'clearly less than the forecast' of 7.3% of output and might even fall by an extra 0.5 percentage points.
Finance Minister Fernando Teixeira dos Santos had said earlier that Portugal did not intend to seek external help, and 'would do everything' to avert such an eventuality. EU diplomats say Portugal has come under heavy pressure from several European countries to accept outside help.
The ministers spoke after a split emerged at the central bank overnight over whether Portugal would require outside help.
Carlos Costa, the governor of the Bank of Portugal, rejected suggestions that the country would require financial aid. 'I have said it and I will say it again: the Portuguese are solving their problems and have the ability to solve their problems themselves,' he told reporters.
But shortly afterwards, an administrator at the bank, economist Teodora Cardoso, took a different line, saying that a bail-out by the International Monetary Fund or the European Stabilisation Fund was 'probable'.
Tomorrow's auction of debt marks Portugal's first foray into the bond markets this year, with the expected sale of €750m to €1.25 billion worth of long-term debt. The rate or yield on benchmark 10-year bonds closed at just over 7% on Monday and remained at that level this evening.
In the case of Greece, rates above 7% began to become prohibitive and were an extra factor making the country the first euro zone member to be rescued by the EU and International Monetary Fund.
Meanwhile, attention has also focused on Belgium, which today marked 212 days without a government. The spread, or difference, between the interest rates demanded by investors to buy Belgian bonds and the benchmark German bund reached almost 1.5 percentage points earlier today.
Portugal economy set to slow by 1.3%
The Bank of Portugal forecast that the Portuguese economy would suffer a 1.3% recession this year, downgrading a previous outlook of zero growth as the country fights to avert a debt rescue.
'Projections for the Portuguese economy point towards a contraction of economic activity of 1.3%, followed by growth of 0.6% in 2012, in the context of a clear fall in internal demand and a robust growth in exports,' the Bank said.
The revision reflected a 'significant budgetary adjustment,' it added.
In its previous projections, the Bank had not taken into account the effects of austerity measures aimed at reducing the country's public deficit to 4.6% of GDP by the end of 2011.
The Bank expected growth of 1.3% for 2010, against the 1.2% it had previously forecast. This was due to better than expected growth in exports and consumer spending, it said.
