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:: Europe debt market tensions worsen ahead of summit - Pan Pylas and Gabriele Steinhauser – www.news.yahoo.com

BRUSSELS – Europe's debt market jitters flared up again Wednesday as investors worried about the near-term fates of Portugal and Ireland, an ill omen on the eve of a summit where EU leaders plan to complete their crisis-fighting plan.

Investors doubt the two countries, embroiled in financial crises that have created political shockwaves, will be able to cut their borrowing loads through austerity measures alone, meaning Europe's debt crisis will likely get worse before it gets better.

Portugal's minority government could fall if lawmakers fail to back the latest austerity package later Wednesday. That would put Lisbon into political limbo just as it faces huge debt repayment deadlines and desperately needs markets' confidence.

In Ireland, the results of stress tests due next week will reveal the true extent of capital needs at the countries' struggling banks, which the government has already warned will exceed euro10 billion ($14 billion). Dublin wants more help with the costs of restructuring and recapitalizing its banks, threatening to burn senior bondholders — who have so far been spared in Europe's debt crisis — if none is forthcoming.

At the same time, Prime Minister Enda Kenny's new government is not making many friends among its eurozone counterparts by continuing to refuse changes to its rock-bottom corporate tax rate even while demanding lower interest rates on its euro67.5 billion ($96 billion) bailout agreed in November. Analysts expect Ireland will be refused any easing in its rescue loan repayment rates.

The rising tension in Ireland and Portugal is drawing investors' attention back to Europe's debt crisis after a couple of weeks when Libya's conflict and Japan's natural disasters took media headlines.

The signals from the bond markets are distinctly pessimistic.

The yield — or interest rate — on Portugal's ten-year bonds was up 0.11 of a percentage point at 7.60 percent, just short of euro-era highs, while Ireland's yield was up 0.23 percentage point to 10.06 percent, a record.

More significantly, investors are asking for even more to lend in the short term. Analysts say that is due to concerns among private investors that they could be forced to take losses in case of bailouts under the eurozone's crisis regime for 2013 onwards.

Although EU officials have repeatedly stressed that no debt issued before June 2013 would face a restructuring, markets are unnerved by the fact that the European Stability Mechanism, the new bailout fund, will get preferred creditor status. That means it will get repaid before any private creditors, making their investments more risky.

"Investors are now measurably more concerned about the short term outlook for Irish sovereign debt today than they were even during the height of the crisis in early November," said Simon Derrick, a senior analyst at The Bank of New York Mellon.

Though Portugal has not been bailed out yet, markets are acting like it's just a matter of time.

If its minority government doesn't manage to engineer a compromise agreement with opposition parties and ends up losing the vote, Prime Minister Jose Socrates has said he will no longer be able to run the country.

Analysts say a period of political uncertainty — likely to last at least two months — in Portugal would make it more likely that the country will end up becoming the third euro country to get bailed out, following earlier rescues of Greece and Ireland.

Ireland's rates have surged even more than Portugal's this week on speculation that the Prime Minister Kenny will this week present new plans to force bondholders to take a share of the massive debts built up by Ireland's banks — the main catalyst behind the Celtic Tiger's spectacular fall from grace.

If so-called senior bondholders are forced to take on their share of the Irish banking system's effective collapse, then banks in Germany, Britain and the United States — the three biggest lenders to Irish banks — could become the biggest losers.

Some analysts have argued that Ireland's tough rhetoric is merely a ruse to get the German and French governments to hand it a reduction in its bailout interest rates — as they did for Greece at their last summit.

Most economists agree that the austerity efforts won't be nearly enough to help the country cover the cost of bailing out its banks.

Funds continue to fly out of Ireland as depositors and bondholders cash out. Economists estimate that the Irish banks might need an additional euro35 billion ($50 billion) beyond the current euro50 billion ($71 billion) estimate.

In addition, the Irish banks are on financial life support from the Irish Central Bank and ECB, which are providing them more than euro180 billion ($255 billion) in short-term loans to keep them running.

Michael Somers, who was chief executive of Ireland's National Treasury Management Agency from 1990 to 2009, is skeptical of Ireland's ability to pay its bills. He says renegotiation of bondholder debt is inevitable.

"There's no way we'll ever pay this stuff back as far as I can see. It'll just be refinanced," Somers said. "The awful thing about it is, I know there are figures going round which show no growth for the next three years. And with the possibility of further tax rises and expenditure cuts, you wonder how actually we're going to get out of this mess. We're in a downward spiral."

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