Tensions have again erupted in eurozone debt markets, with speculation swirling that Portugal could be forced to seek a bail-out after its borrowing costs climbed to new highs.

The European Central Bank again bought up Portuguese bonds after the yield on Portuguese 10-year bonds climbed to 7.63% — the highest level seen since Portugal jointed the eurozone.

After the ECB’s intervention, yields subsided to 7.29%. All the same, most economists estimate that Portugal will not be able to continue to service its debts if its borrowing costs remain above 7%.

The country is struggling with large budget deficits, high levels of debt and an anemic economy. And a tough austerity budget announced by the Portuguese government is likely to tip the economy back into recession this year.

Already, concerns over Portugal’s heavy debt levels have caused major institutional investors to shun Portuguese debt. This has raised concerns that the country may not be able to raise the €9.5 billion ($13 billion) it needs to repay bonds that mature by the end of June. The ECB is the only major buyer of Portuguese debt.

Lisbon was quick to blame “speculation” for the latest jump in interest rates, and to call for a European response.

But the European response may not be quite what Lisbon is looking for. Already, some senior eurozone officials have been quietly urging Portugal to accept that it has become the latest eurozone casualty, and to put its hand up for a politically humiliating bail-out. They believe that if Lisbon acts promptly, more widespread disruption in eurozone debt markets can be avoided. And with the ECB as the only major buyer of Portuguese bonds left, Lisbon has little negotiating power.

There are different views as to what has triggered the latest round of jitters in eurozone debt markets.

Some believe that it’s largely due to German opposition to expanding the $US1 trillion EU-IMF bailout fund, and allowing the fund to buy up the debts of troubled eurozone members. Others put it down to scepticism that the plans for increased eurozone economic co-operation — which have been put forward by France and Germany — will have any teeth.

Still others attribute the latest instability to the growing likelihood that the next Irish government will force senior lenders to Irish banks to share in some of the losses.

These fears were increased overnight, when the Irish government delayed injecting additional capital into three troubled Irish financial institutions — Allied Irish Bank, Bank of Ireland and EBS Building Society — until after the February 25 election, saying it would leave the decision to the next government to deal with.

One of the terms of Ireland’s €85 billion ($US115.5 billion) bail-out from the European Union and International Monetary Fund was that the banks held a tier one capital ratio of 12% by the end of February, but the deadline has now been pushed back to the end of March.

At this stage, the election is likely to return a coalition government, consisting of the centre-right Fine Gael Party, and the centre-left Labour Party. One of the biggest issues of the election campaign is what to do with the country’s stricken banks.

Public opinion in Ireland is strongly in favour of walking away from the Irish government’s pledge in 2008 to guarantee all the debts of Irish banks — including monies owed to depositors and senior bondholders. The guarantee has left taxpayers shouldering massive losses. Already the Irish government has spent €52.8 billion on recapitalising the country’s banks — and mounting losses from bad loans may require the government to inject up to €50 billion more.

The Fine Gael Party — which is expected to be the dominant party in the coalition — has suggested a compromise solution. This would see the Irish government continue to guarantee the debts of Ireland’s less bad banks — Bank of Ireland and Allied Irish Banks. But bondholders in Ireland’s two worst banks may be forced to write-down part of their debt.

Not surprisingly, Ireland’s eurozone partners are pushing the country to fully honour its 2008 pledge, because they’re worried that a decision by a eurozone country to force lenders to carry some losses could trigger a run on major banks in the eurozone, which have heavy exposures to the debt.

But with mounting anger in Ireland over the massive cost of the bailing out the Irish banks, the next Irish government is likely to try to force creditors to bear at least some of the losses.

And this will mark fresh stage in the eurozone debt crisis.