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LONDON/LISBON (Reuters) - Portugal's slide towards becoming the next Greece - needing a second bailout to avoid bankruptcy - accelerated on Monday as untrusting underwriters hiked the cost of insuring Lisbon's bonds to new highs and insisted it be paid up front.
Business and consumer confidence also hit record lows, the latter battered by the lower salaries and across-the-board tax hikes that were part of Portugal's painful austerity program.
Banks and others offering default insurance to holders of Portuguese sovereign debt have begun demanding huge up-front payments rather than allowing costs to be spread over the term of the contract.
On Monday, this meant that it cost a whopping 3.95 million euros to insure 10 million euros in bonds over five years, payable now.
It made Portugal the second-highest sovereign to insure in the world, after Greece, and implied a huge lack of confidence in market circles about Lisbon's future.
While Italian and Spanish borrowing costs have fallen, Portuguese bonds have come under intense pressure from investors after Standard & Poor's downgraded 15 euro zone countries earlier in January, putting Portugal in the "junk" category.
Its already soaring 10-year bond yields surged on Monday by 171 basis points to 17.353 percent, suffering their third worst day in the euro era and adding to expectations that Lisbon will have to get a second bailout from the European Union and International Monetary Fund to go with the 78 billion euro package it has already been handed.
There is also increasing concern that Portugal will be forced to restructure its debt like Greece, even though its debt levels of around 105 percent of gross domestic product are much lower than Greek ones.
In Brussels for an EU summit, Portuguese Prime Minister Pedro Passos Coelho pinned the blame on a failure to sort out a second Greek bailout, for his country's troubles.
"The Greek situation continues, after all this time, to be the main factor of instability," he told reporters. "It would be very good for everybody in Europe and for Portugal that the situation in Greece is resolved as soon as possible."
The decline in business and consumer confidence reflected both Portugal's dire economic condition and the pain of austerity imposed as a condition of its first bailout.
The economic climate indicator, which measures business confidence, slumped to minus 4.7 in January from minus 4.4 in December, the National Statistics Institute said. A year ago it stood at plus 1.6.
INE said its consumer confidence indicator fell to a negative reading of 57.1 in January - also the lowest on record - after minus 56.8 in December.
"For consumers, we couldn't expect anything else, the start of the year brought more unemployment and higher taxes and obviously that is reflected in confidence," said Filipe Garcia, economist at Informacao de Mercados Financeiros.
Meanwhile, the demand for so-called up-front payments on bond insurance policies, or credit defaults swaps (CDS) showed a growing distrust among banks of Portugal's ability to pay its debts.
Prices are quoted up front when they reach extreme levels and require the buyer of protection to pay a single lump sum instead of annual premiums.
Up-front payments for Greece began in September last year.
Additional reporting by Marius Zaharia. Writing by Jeremy Gaunt/Mike Peacock