Debt troubles rock Iberian Peninsula

Europe’s debt problems took a turn for the worse on Thursday, as the government of Portugal resigned and Spanish banks felt the sting of credit downgrades.

The resignation of the Portuguese government pretty much guaranteed that the debt-laden nation will require a bailout from its European Union partners. The country’s 10-year bonds were sold off, sending yields to 7.71%.

The soaring yield will have real consequences soon enough—Portugal faces two major bond maturities in the next couple of month, with a €4.5 billion repayment due in April, and another in June of about the same size.

“In the near term, we suspect bond yields will keep pushing higher, if only because uncertainty will prevail,” says Barclays Capital.

There is some question as to whether an interim government would have the constitutional authority to negotiate a bailout package, and new elections are not expected before the end of May.

The Portuguese government is not the first to fall victim to the European debt crisis. Ireland’s government was brought down earlier this year after it took a bailout and enacted severe cutbacks, forcing an election that was won by the main opposition party.

Meanwhile there’s trouble next door, as Moody’s has downgraded the debt issued by 30 Spanish banks. While the three largest banks were unaffected, the move highlights the weakness in Spain’s financial system.

The downgrade also comes on the heels of a downgrade on government debt, which was cut to Aa2 two weeks ago. The yield on Spanish 10-year government bonds hovers near 5.2%.

“We have to keep doing what we have been doing so far—continue to enact reforms, live up to our commitments, strengthen our economy,” said Spanish Finance Minister Elena Salgado.

A European Union summit in Brussels on Thursday will seek to finalize measures aimed at finally drawing a line under the sovereign debt crisis dogging the continent.