Portugal's outgoing prime minister Jose Socrates has insisted that his country does not need a financial rescue package, as a political crisis raised fears of an international bail-out.
His comments came as the yield on 10-year Portuguese government bonds rose to a new euro-era high after an overnight cut to Portugal's credit rating from Standard and Poor's.
'Portugal does not need a financial rescue plan and I will maintain this in defending my country,' he told reporters after an EU summit in Brussels which was clouded by his country's financial troubles.
'Portugal must demonstrate that it is a country that can resolve its own problems,' added Socrates, who resigned on Wednesday and was attending the EU summit in a caretaker capacity.
He warned that Europe would suffer if Portugal was forced to tap into a euro zone financial rescue fund that has already been used by Ireland after Greece received its own bail-out last year. He said this would put more countries at risk from a 'domino effect'.
Socrates resigned late on Wednesday after all five opposition parties voted against his minority government's latest package of austerity measures, which proposed further tax hikes and social spending cuts.
Last night, Standard & Poor's downgraded Portugal's credit ratings by two notches to BBB and warned it could cut it again by one notch as early as next week depending on the final shape of the euro zone bail-out fund.
The 10-year yield - the interest rate demanded by investors to buy the bonds - rose above 8% for the first time since the launch of the euro currency.
The latest bond market moves came as European Central Bank chief Jean-Claude Trichet and the German Chancellor Angela Merkel said it was important that Portugal stuck to its fiscal targets despite the current political crisis.
Ms Merkel and other EU leaders made it clear the country needed to stick to the austerity programme already agreed with the EU no matter who was in charge, and whether or not Portugal did eventually seek a bail-out.
