The yield on Portuguese 10-year bonds - a key gauge of investor sentiment - touched a potentially unsustainable 7.18 percent at one stage Monday. It then fell back to 6.94 percent on speculation that the European Central Bank was intervening by buying bonds. Yields drop as prices rise.
"I wouldn't be surprised if the ECB is trying to stabilize markets, but it's a Band-Aid approach," said Neil Mackinnon, global macro strategist at VTB Capital. "All it does is that it kicks the can down the road; it doesn't resolve the underlying issues."
Since the bailout of Greece in May, the ECB has taken a more active role in Europe's debt crisis by buying the bonds of the most imperiled eurozone countries. As of last week it had bought 74 billion ($96 billion) in government bonds. It doesn't have a target or limit but withdraws that same amount of money from the economy to avoid inflation risks. The U.S. Federal Reserve, by contrast, does not withdraw any cash, meaning it effectively creates new money - a step the ECB is still loathe to take.
Monday's early spike in yields followed a report in German newspaper Der Spiegel that France and Germany are both pressing Portugal to tap a European rescue fund to keep the crisis from spreading to much-bigger Spain.
"We have never pushed countries to take a certain step, and we will not do so in any other case," German Chancellor Angela Merkel said during a visit Monday to Malta, according to the DAPD news agency.
Portugal has not asked for help, "and it is not being pushed into it by Germany," Merkel added.
Amadeu Altafaj Tardio, the spokesman for EU Monetary Affairs Commissioner Olli Rehn, also denied that European officials were preparing a bailout for Portugal.
"There is no discussion to this effect and none is envisaged at this stage," he said.
Analysts estimate that financial assistance for Portugal, which has been dogged by low growth and rising debt levels, would be between 50 billion and 100 billion ($65 billion to $130 billion).
Though Portugal insists it does not need a rescue, experts say the events distinctly echo what went on with Ireland just a couple of months ago.
Before Ireland was forced to accept a rescue from its partners in the EU and the International Monetary Fund, there were numerous reports suggesting that Germany, in particular, was pushing Dublin to take the funds to contain the crisis. The Irish government also insisted it didn't need any help before eventually accepting a 67.5 billion ($87.5 billion) bailout.
"First we have the speculation that Portugal is being pressured into taking funds in order to save the crisis from spreading to Spain," said Derek Halpenny, an analyst at the Bank of Tokyo-Mitsubishi UFJ. "Then we get the denials from Portugal."
The prevailing view in the markets is that Europe may be able to support Portugal but that a bailout of Spain would test the limits of the existing bailout fund.
potentially putting the euro project itself in jeopardy if governments don't put up more cash.
Spain accounts for around 10 percent of the eurozone economy, compared with Greece, Ireland and Portugal, which account for only about 2 percent each. The yield on Spanish 10-year bonds rose to 5.5 percent Monday, while benchmark German bonds were steady at 2.9 percent. Germany's economy is healthy compared with Portugal and Spain, but it could also suffer if it has to help shore up another ailing eurozone country.
Markets have brushed off the Portuguese government's repeated claims over the past year that it doesn't need financial help. The minority government has introduced an austerity program of tax hikes and pay cuts it says will restore fiscal health.
The key to whether Portugal gets a bailout sooner rather than later could come Wednesday, when the government aims to raise 1.25 billion ($1.62 billion) by auctioning off 3-year and 9-year bonds. Portugal needs to ask investors to lend it 20 billion ($26 billion) this year to finance public accounts.
If it doesn't get enough investor backing or there's a consequent impact on Thursday's debt offerings from Spain and Italy, then analysts reckon a bailout could come soon after. All eyes would then turn to next week's meeting of eurozone finance ministers in Brussels.
"Perhaps more interesting is the market's attitude to Spanish and Italian paper on Thursday; this will be a truer test of whether or not contagion is getting a grip," said Jane Foley, an analyst at Rabobank International.
Portuguese officials have been trying to recruit the help of China, which has already used its huge foreign currency reserves to buy Greek and Spanish debt.
Chinese President Hu Jintao, on a state visit to Lisbon last November, promised to help Portugal out of its financial crisis, though he didn't elaborate.
Portuguese Finance Minister Fernando Teixeira dos Santos went to China twice in three months at the end of last year and said Beijing would help Lisbon with financing. He declined to provide details but local media have cited unnamed sources as saying it will amount to at least 4 billion invested in the country's bonds.
Spanish Economy Minister Elena Salgado lent Portuguese authorities support Monday, saying Portugal won't need a bailout because it is enacting reforms that will help save the nation's economy from imploding.
"Portugal will not need any outside help," Salgado said in an interview with Spain's Cadena Ser radio. "I think Portugal will not have to resort to any plan because it is fulfilling its commitments."
She added that Portugal "has structural weaknesses, but will make the corresponding reforms."