(Fortune) -- As Greece barreled closer to the edge of a debt default this week, fears that the crisis would infect other countries rattled the world's financial markets. "It's not a question of the danger of contagion," Angel Gurria, the head of the Organization for Economic Cooperation, said. "Contagion has already happened. This is like Ebola."
If Gurria is right, who's next? Many analysts and economists point to Portugal, the Euro Zone's poorest country, with Spain following close behind. "There is a very high likelihood that Portugal will be the next one to run into trouble," says Nariman Behravesh, chief economist for IHS Global Insight.
That's especially true if the 16 euro-zone countries get their act together and deliver a 45-billion euro bailout package to Greece as promised, a scenario similar to what happened to Bear Stearns in the banking crisis. Then Portugal may end up being the first to default. Jonathan Loynes, chief European economist of macroeconomic research firm Capital Economics, agrees with Behravesh: "Portugal is on the list, just behind Greece," he says.
Indeed, Portugal got the financial equivalent of a negative diagnosis this week when Standard & Poor's downgraded its debt on the same day the ratings agency slapped Greece's government bonds with junk bond status. Spain's warning came 24 hours later.
Markets responded by sending the yields on Portugal's 2-year bonds to over 5%. The spread between German and Portuguese bonds also hit new highs, as did the price of its credit default swaps, a kind of insurance that investors take out to protect against default.
CMA DataVision, a London-based research firm that tracks the riskiness of sovereign debt, rated Portugal's performance through the first quarter to be the worst in the developed world. The spread between the starting price of swaps in January and the end price in March widened to 52.3%, according to analyst Simon Mott. "That's like what would happen if you're a risky driver, you'd pay much more to insure your car than if you were a safe driver," he says.
A familiar scenario
"The signals now being sent to Portugal are the same ones that were sent to Greece," says economist Michael Arghyrou of the Cardill Business School.
Portugal, in many ways, mirrors Greece's problems. Like its suffering Euro-partner, Portugal has weak public finances -- its budget deficit rose to over 9% last year, six percentage points higher than the standards stipulated by the European Union. And its debt equals about 80%; Greece's hovers around 115%.
But Portugal's deeper problem is its slow growth rate over the last decade, according to Columbia University economics professor Ricardo Reis. Last year, Portugal's gross domestic product was in the red, declining by 0.1%, this year it's forecast to slow down even further, by 3.3%. To deal with slow growth, borrowing from foreign investors became Portugal's lifeline -- and that's at the core of its trouble.
"If interest rates stay high, Portugal will not be able to continue borrowing and will eventually run out of money," says Reis. "The pessimistic growth forecast than becomes a self-fulfilling prophecy."
To try to stop this from happening, Portuguese officials kicked into gear immediately after S&P's bond ratings report to assure investors that unlike Greece, Portugal would stay afloat and not sink under the fiscal pressure.
"We must remain calm," pleaded Portuguese Finance Minister Fernando Teixeira dos Santos. And Prime Minister Jose Socrates met up with political rival Pedro Passos Coelho to announce they would use "any means necessary" to push through new austerity measures and reforms rapidly.
Sound familiar? It should. It's almost exactly the same scenario, albeit at less intense levels, as the one that played out last December and January in Greece after Fitch downgraded its debt. The impetus then: The newly elected socialist government had revealed that its fiscal situation was far worse than had been laid out by the previous government.
Portugal, at least, does not seem to have Greece's credibility problems. Its statistics aren't being doubted. "The situation in Portugal is not the same as in Greece," French Budget Minister Francois Merouin said this week. "The Portuguese did not lie [about their finances.]"
Both countries, though, are suffering from Germany's and the euro-zone's indecisiveness which has roiled financial markets. "Investors are scared that if Spain and Portugal get into trouble, no help will materialize," says Reis. "It's the equivalent of the U.S. federal government giving out a stimulus and saying, 'We won't help California, or, then again, maybe we will.'"
A fix that may be too big
In the end, even if there is the political will to solve the problem, the amount of money that would be needed to prevent defaults in all of three of Europe's weaker southern tier economies might just be too huge.
"What will it take to bail out these countries -- a plausible number that's been bandied about is 600 billion euros," says IHS Global Insight's Behravesh. "The EU has had a hard enough time coming up with 45 billion, let alone 600. The EU has to make it clear that it has a plan, a big plan."
And that big plan has to be put into place fast, because Spain's troubles loom, and they are more challenging than what's facing Greece or Portugal. Unemployment hovers at 20% and the country is reeling from a housing bubble that burst last year that sent indebtedness in both the private and public sector soaring.
This year alone, Spain must meet a debt obligation of 225 billion euro -- the equivalent of Greece's entire economy. "Spain is the biggie," says Behravesh. "It's got everybody's attention." As it should, if Spain catches the default virus, it has the potential to become too big to fail, but too sick to cure.
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