By Paul Carrel and Terhi Kinnunen
FRANKFURT/HELSINKI (Reuters) - The European Central Bank said on Thursday it could soon raise interest rates, heightening concerns about the implications for struggling euro zone countries as EU leaders strive to find a solution.
If the central bank were to raise interest rates to stem inflation, possibly as early as next month, it would push up the costs of borrowing across the 17-country euro zone, increasing the cost of funding for highly indebted countries such as Greece, Ireland, Portugal and others on the euro zone periphery.
ECB President Jean-Claude Trichet was explicit in a news conference after the bank decided to keep interest rates on hold at a record low 1.0 percent saying: "An increase in interest rates at the next meeting is possible."
Analysts said they were concerned about the ramifications of a rate rise for countries such as Ireland, which is already frustrated by the high rate of interest being charged on its EU/IMF bailout loans, which stands at around 5.8 percent.
"We believe the risks assigned to such a decision are high in a context of the periphery situation remaining under stress," said Jacques Cailloux of RBS European Economics.
Trichet did say a series of rate rises was not on the cards, limiting damage to the likes of Portugal, widely regarded as the euro state most likely to need emergency EU/IMF assistance next, following in the footsteps of Greece and Ireland.
A successful bond issue by Spain on Thursday suggests it is under considerably less threat, though markets could still turn their fire in its direction if Portugal succumbs.
Center-right EU leaders, including Germany's Angela Merkel and Ireland's prime minister-elect Enda Kenny, will meet in Helsinki on Friday.
The gathering has been called to try to forge agreement on a "comprehensive package" of measures that EU leaders hope will draw a line under their year-long debt crisis. They are aiming to agree the full package at a summit on March 24/25.
But Finnish Finance Minister Jyrki Katainen, who called the meeting, said Ireland wanted to discuss the costs of its bailout, and that was also likely to be on the agenda.
"The issue will probably be raised," Katainen said.
"We must look at the big picture and review what is Ireland's debt sustainability level. The essential thing is that Ireland can pay back its debt."
Merkel said on Wednesday that if Ireland had problems with the interest rate it was an issue she would consider, but said Dublin could not presume to pay less for its rescue loans than.
"We cannot artificially reduce interest rates. Ireland and Greece have taken aid," she said, adding that Ireland's package, agreed in November, was only a few months old.
Kenny, keen to show voters he is tackling the EU over the cost of the 85 billion euro bailout, said he would not hold back.
"Obviously we'll be dealing with that in Helsinki," he told Reuters on Thursday when asked what steps he would be taking to try to secure a lower interest rate on the loans.
"We made our position very clear to President Barroso and the chancellor," he said, referring to Jose Manuel Barroso, the head of the European Commission, and Merkel.
Friday's gathering in Helsinki will not produce any formal decisions but is expected to shape thinking ahead of a summit of heads of state from the 17 euro zone countries on March 11.
That meeting will discuss economic governance, with France and Germany intent on having the rest of the euro zone sign up to a "competitiveness pact," and may touch on the European Financial Stability Facility (EFSF), the 440 billion euro rescue fund set up in May last year and used to bail out Ireland.
Because of guarantees built into the EFSF to maintain its triple-A credit rating and allow it to raise money more cheaply on international markets, the facility only has an effective lending capacity of around 250 billion euros.
The European Commission and many euro zone member states want the threshold raised to the full 440 billion euros, but Germany's backing is needed and Berlin is reluctant.
Katainen said competitiveness -- including issues such as countries agreeing legal limits on the size of their deficits, gradually raising retirement ages and agreeing a common corporate tax base -- would be discussed on Friday.
"For us it is important that, whatever we do, the whole EU area will have common rules, this cannot become an inter-government exercise driven by large countries," he said.
SPAIN SELLS BONDS BUT AT A COST
While Ireland is intent on securing a better deal on its bailout, EU policymakers are increasingly concerned about Portugal which is seen as likely to need a bailout as soon as April.
A euro zone source told Reuters on Thursday it was "only a matter of time" before Portugal needed assistance and said Lisbon was only managing to sell bonds at auction thanks to buying from Portuguese pension funds and some foreign buyers.
Spain, another potential recipient of EU aid if the contagion were to spread beyond Portugal, held a successful auction of three- and five-year bonds on Thursday, which helped lift some of the gloom in financial markets.
The Treasury easily sold a total of 3.8 billion of 2014 and 2016 dated bonds, but the yields were around 35 basis points higher than at the last auction of similar bonds on February 3.
"What it really tends to reinforce ... is that there's been a very distinct dissociation between Spain and Portugal, particularly over the last three or four weeks and this really underscores that," said Marc Ostwald, strategist at Monument Securities. "But one wonders how durable this is going to be."
(Additional reporting by Nigel Davies in Madrid and Luke Baker in Brussels, editing by Mike Peacock)