Cost of government debt could become unsustainable for parts of eurozone

Eurozone countries are expected to borrow less on the bond markets in 2011 than they did this year but the interest rates investors are demanding to buy government debt pose a burden that may become unsustainable for the likes of Spain and Portugal.

As a result, banks are already questioning whether Portugal will be able to tap the private sector for the amounts that must be raised to repay maturing debt, which are higher next year than in 2010.

"The question really out there is 'who will be willing to buy peripheral paper like Portugal?'," said Michael Leister strategist at WestLB in Dusseldorf.

"With historic volatility and thin liquidity, the more traditional investor base is taking a really defensive stance on some peripheral issuers."

Portugal must repay debt of more than 12bn euros (10.14bn) in the first half of 2011.

Up to 863bn euros of eurozone debt will be sold in 2011, analysts estimate, down from more than 900 billion euros in 2010, as nations seek to slash the bloated budget deficits that threatened to bring the currency bloc to its knees earlier this year.

Debt agencies will be hoping stiff budget cuts ensure easier and cheaper access to funding after a troubled 2010, when fears over fiscal stability in Greece and Ireland caused debt yields to soar to record levels, leading both states to seek bailouts.

However, political wrangling over how to resolve the crisis permanently looks likely to keep uncertainty, and therefore borrowing costs, high into next year, threatening access to capital markets at a sustainable rate.

"In the absence of Greece and Ireland I'm sure Portugal and Spain will be the market's main barometer when it comes to the market's appetite towards the periphery," said Ioannis Sokos, rate strategist at BNP Paribas.

He added: "I don't think (Portugal) will make it through 2011 without assistance."