LONDON (Reuters) – European leaders insist Ireland's bailout will help draw a line under the euro zone debt crisis but investors are already looking to Portugal and Spain as candidates to fall next.
Following are key factors and staging posts which could dictate whether the sovereign debt crisis, which has already engulfed Greece and Ireland, will spread further.
Perhaps the most important factor will be what happens to Spanish and Portuguese borrowing costs.
Portuguese Finance Minister Fernando Teixeira dos Santos has said borrowing costs above 7 percent could force the country to seek outside help although the government has since backtracked on that.
Portuguese 10-year government bond yields are hovering around 7 percent. Equivalent Spanish yields are lower at 5.4 percent. Some economists view a yield of 6.5 percent on benchmark 10-year Spanish bonds as the tipping point that would push the country into an unsustainable financing cycle.
EUROPEAN STABILITY MECHANISM
Investors have been spooked by German-led plans for a permanent mechanism after 2013 when the safety net it set up after the Greek crisis expires.
Germany had insisted it should involve substantial write-downs for private bondholders, prompting markets to push yields yet higher as they built in the risk of taking a "haircut" in any sovereign debt restructuring.
Those demands have been dropped as finance ministers laid out a more nuanced mechanism that would involve bondholders being dealt with on a case-by-case basis.
How this plan develops over the rest of this year and next will be crucial for euro zone borrowing costs. Look to next month's meeting of euro zone finance ministers followed by an EU heads of government summit as the first key staging posts.
Lisbon has targeted a budget deficit of 7.3 percent of GDP for 2010. Data will be released in January. If it has succeeded, some of the market heat on Portugal may dissipate. Of course, the reverse is also true.
Either way, it will not be out of the woods even though it has a relatively manageable fiscal deficit and debt compared to its struggling peers, no major problems at its banks and no property bubble -- buying it some extra time.
Portugal faces hefty redemptions next year -- maturing government bonds that will have to be repaid. In April, it has to repay 4.5 billion euros, and in June, nearly 5 billion euros in bonds come due. Either could prove to be a breaking point if market conditions have not improved.
The government's budget passed with opposition support but popular unrest is growing at its harsh austerity measures and will test politicians' resolve next year.
A Spanish bailout would cost far more than those of Greece, Ireland, or any aid for Portugal and would be the point at which the euro zone's safety net would be stretched to breaking point.
Madrid does have a banking problem, although not with its largest ones. The government has provided 15 billion euros in credit lines to smaller savings banks and forced them to merge. The success of that process will be crucial.
After a construction and property market bubble burst, the main problem could be generating enough economic growth to raise the tax revenues to eat into public debt.
The government aims for a budget deficit of 6 percent of GDP next year, but that target is based on what many see as an overoptimistic forecast of 1.3 percent growth.
Spain's deeply-indebted autonomous regions -- with a combined debt of 10 percent of GDP -- must also play their part if the government's programme is to succeed.
Spain's budget forecasts a cut in net debt issuance in 2011 to 43.3 billion euros from 76.2 billion this year, which should help. But the government faces some big debt repayments next year with the first major maturity on April 30.
Nonetheless, a Reuters poll of economists this month showed that while 34 of 50 expected Portugal to need outside aid, only four thought Spain would need to be bailed out.
Most analysts do not expect Belgium, generally seen as part of the European core, to need a bailout given solid growth, an entrenched savings culture and a relatively low budget deficit but here, politics is key.
Dutch- and French-speaking parties have been bickering since a June election, in which a party wanting the region of Flanders to split from Belgium won the most seats. A caretaker government did pass a budget for 2010, but its mandate is essentially limited to keeping the country ticking over.
Italy also looks safe for now. Ratings agency Moody's said this month that political instability -- with Prime Minister Silvio Berlusconi facing no-confidence votes -- is nothing new and on the upside, public finances had deteriorated less than in many of its peers and it had reformed its pension system.
For Ireland and Greece the granting of more time than expected to pay back their EU/IMF loans could be crucial. Ireland's loans will run for an average of 7.5 years and the European Union agreed to extend the maturities on Greece's three-year rescue package too.
Greek Finance Minister George Papaconstantinou said Athens will now have until 2021 to repay its 110 billion euro ($145.7 billion) EU/IMF bailout loan in return for slightly higher interest rates.
He had previously flagged up 2014 and 2015 as a potential crunch point when the state would have gone from paying off 40 to 50 billion euros a year to 70 billion.
For Greece, the IMF's offer of more help if needed after its bailout programme ends, could also help but with the European Commission forecasting its economy will contract 4.2 percent this year and by 3.0 percent next, it is still in dire straits.
(Writing by Mike Peacock; editing by Janet McBride.)