Germany has said it will help finance a Portuguese bailout as consensus builds that Portugal will be the third eurozone country to seek a loan from the European Union and the International Monetary Fund.
German Finance Minister Wolfgang Schaeuble signaled readiness to support Portugal if it faces difficulty in funding itself in financial markets, although he said it is not in a state of emergency, Japan's Nikkei business daily reported.
Germany's AAA credit rating has shouldered the greatest burden of EU bailouts and its government has recently tried to lay down stricter conditions attached to loans provided by the European Financial Stability Facility (EFSF), such as lower corporation tax and higher pension ages.
Expectations for a Portuguese bailout peaked today as bond yields rose to and stayed at 7% for 10 straight days, mimicking the same high yields that led to a Greek and Irish bailout in 2010.
A senior eurozone source alleges that the situation signals a Portugese bailout by April at the latest.
"Portugal is drowning. It's not going to be able to hold on beyond the end of March," the eurozone source said. "That's already understood to be the case in financial markets, but now it's also understood among [EU] finance ministers."
Schaeuble suggested in an interview with the Nikkei that Germany would be amenable to further aid for debt-laden eurozone members provided they agreed to structural reforms such as cutting public pensions.
Portugal is so far managing to fund itself but the cost of borrowing is now close to or at record highs and is becoming increasingly punitive.
The EU has discussed a rescue plan for Portugal but it is dependent on Lisbon asking for the aid and making the request to both the EU and the International Monetary Fund. Portugal remains adamantly opposed to asking for assistance.
Schaeuble told the Nikkei that Germany has pledged to demonstrate a sense of solidarity and it must prevent problems from spreading to Spain.
Monitoring and limiting excessive capital flows will be high on the agenda at a meeting this weekend of Group of 20 finance minsters in Paris.
Germany and G20 chair France plan to push for tougher regulations, Schaeuble was quoted as telling the Nikkei.
Blaming excess liquidity for the global financial crisis triggered by the collapse of US investment bank Lehman Brothers, he stressed the importance of reducing it without harming growth. The United States is in agreement on getting a better grasp of capital movements, he said.
(EURACTIV with Reuters.)