Up to Portugal to convince markets: ECB's Trichet

PARIS (Reuters) - Portugal must stick to its deficit reduction targets and implement more promised economic reforms to convince markets it is able to service its debt and does not need outside aid, European Union policymakers said on Saturday.

European Central Bank President Jean-Claude Trichet and EU Monetary Affairs Commissioner Olli Rehn, asked whether Portugal would be the next euro zone country to need an EU/IMF bailout after Greece and Ireland, said the ball was in Lisbon's court.

"We call on all governments, without any exception, first to apply the plan that they have ... as rigorously, convincingly and ethically as possibly, and they have themselves to be ahead of the curve in all respects," Trichet told a news conference after a meeting of G20 finance chiefs in Paris.

"This is a message again for Portugal, a very strong message for Portugal as well as for others. It is up to the countries themselves to be convincing in making their case to the market," he said.

Portuguese sovereign bond yields hit a euro lifetime high last week after disappointing growth figures pointed to the country sliding back into recession this year, prompting the ECB to intervene to buy bonds on Friday, according to traders.

Figures showing the economy shrank by 0.3 percent in the last quarter of 2010 cast doubt on whether Lisbon would be able to achieve promised deficit reductions in 2011.

The minority Socialist government has pledged to cut the budget deficit to 4.6 percent of gross domestic product this year from around 7 percent in 2010.

A euro zone source told Reuters on Thursday that EU states were increasingly concerned about Portugal's ability to fund itself in financial markets and believed Lisbon would need to seek a bailout by April.

READY TO HELP

Asked whether Lisbon should request assistance before a March EU summit, Rehn told the news conference: "It is essential that Portugal sticks to its fiscal targets ... Moreover, it is essential that Portugal will further substantiate the structural reforms that have been initially announced.

"It is a work in progress, and progress has been made."

European Commission President Jose Manuel Barroso, himself a former Portuguese prime minister, said in a BBC interview on Friday that the EU was ready to support Portugal if required, after the country made the necessary reforms.

Portuguese officials said this week it was up to Europe to resolve the sovereign debt crisis, arguing that if EU leaders agree on a convincing "comprehensive package" at the March 24-25 summit, that will help Portugal weather bond market pressure.

Treasury Secretary Timothy Geithner said EU leaders had made clear they would do whatever it takes to ensure euro zone states in financial distress would have access to financing as they implemented tough austerity and reform programs.

"We welcome the progress European officials are making to strengthen and redesign the financial mechanisms put in place to support economic reform," he said after the G20 session.

Trichet declined comment on an unexplained 15 billion euro spike in ECB emergency overnight lending this week.

A source in Ireland told Reuters on Saturday the glitch was due to bridging financing operations by troubled Anglo Irish Bank and Irish Nationwide Building Society as they seek a speedy sale of their deposit books.

(additional reporting by Toni Vorobyova; writing by Paul Taylor, editing by Mike Peacock)