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By Carmel Crimmins and Axel Bugge
March 31, 2011 11:49 AM EDT
Portugal's budget deficit ballooned above target last year and a disagreement at the European Central Bank threatened to undermine Ireland's plans for finally resolving its bank crisis.
Revised figures published Thursday showed Portugal's deficit was more than a percentage point above target at 8.6 percent of GDP, bringing the overall debt burden that Lisbon is struggling to finance to 92.4 percent of its annual output.
Bond markets, which have been pressing the country for months to seek EU and IMF support, responded by pushing yields on its bonds to new euro-era highs and debt agency plans cast a note of doubt over issuance in weeks ahead.
The resignation of Prime Minister Jose Socrates after parliament rejected a new round of budget cutbacks last week has left Portugal in limbo, with only a caretaker administration that would find it hard to commit to a near-term rescue.
"These (revisions) are very much one-off factors and don't have a bearing on the deficit for next year," said James Nixon, European economist at Societe Generale.
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"That doesn't mean to say there shouldn't be a funeral march for Portugal, funding is untenable given where yields are."
Europe's debt crisis has spread to its banks, which are being forced by rating agency downgrades into the arms of the European Central Bank -- the lender of last resort -- as credit markets shut their doors to them.
Ireland is hoping to persuade investors it finally has control of its financial crisis Thursday when it announces the ultimate bill for bullet-proofing its banks and overhauling the sector.
But vital support from the ECB may not be immediately forthcoming and that could undermine Dublin's plan.
Euro zone official sources told Reuters Thursday that there had been internal disagreements within the ECB's Governing Council over plans for a new liquidity facility and that an announcement of the facility would not be made Thursday as expected.
The ECB is struggling to come up with a solution to how it reins in the emergency support it has given to money markets since the financial crisis hit in 2008, without paralyzing some of those banks.
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With President Anibal Cavaco Silva likely to decide on a date for elections Thursday, the leader of Portugal's opposition has pointed to the option of a bridging loan to tide it over until a new government is in place.
The higher deficit -- due to losses at a nationalized bank and public transport companies -- comes as the government faces paying back 9 billion euros in maturing bonds in April and June.
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