LONDON — The debt crisis in Europe escalated sharply Friday as investors dumped Spanish and Portuguese bonds in panicked selling, substantially heightening the prospect that one or both countries may need to join troubled Ireland and Greece in soliciting international bailouts.
The draining confidence in Western Europe’s weakest economies threatened to upend bond markets, destabilize the euro and drag out the global economic recovery if it is not quickly contained.
The perceived risk of debt defaults in Portugal and Spain drove their borrowing costs to new highs Friday, with the interest rate demanded on Portuguese bonds soaring to a point where it could effectively cut the Lisbon government off from raising fresh cash to run the country.
As a result, Portugal was coming under pressure to immediately request a bailout from the European Union and International Monetary Fund. Officials in Lisbon responded by pushing through a painful round of budget cuts meant to reassure investors and rejected claims that they needed an emergency lifeline. Italian and Belgian borrowing costs also rose Friday.
The bigger fears, however, surrounded eroding confidence in Spain, whose faltering economy is more than twice the size of the Greek, Irish and Portuguese economies combined — meaning that a bailout there could run into the hundreds of billions of dollars.
Coupled with the pending bailout for Ireland and possibility of Portugal, analysts said, a Spanish rescue could severely deplete the $1 trillion stability fund set up by the European Union and International Monetary Fund this year to contain the crisis.
