Portugal seeks bailout as eurozone crisis hits third nation

by
April 7, 2011

The Globe and Mail

Portugal became the third European country in less than a year to seek a bailout when it finally admitted it was effectively broke, a development that could infect neighbouring Spain and even cause political damage to German Chancellor Angela Merkel, whose country funds the single biggest proportion of the rescue packages.

“In this difficult situation, which could have been avoided, I understand that it is necessary to resort to the financing mechanisms available within the European framework,” Finance Minister Fernando Teixeira dos Santos said in a humiliating statement Wednesday night delivered only hours after Portugal was forced to offer stunningly high interest rates to find buyers for its short-term debt.

Some economists feared that the debt contagion could hurt neighbouring Spain, Portugal’s biggest trading partner, even though Spain’s economy seems to be turning around.

“With Portugal in the bailout camp, markets might turn their attention to Spain,” said Benjamin Reitzes of Toronto’s BMO Nesbitt Burns. Spain’s economy is six times larger than Portugal’s, so a debt crisis there poses a much greater risk to the fragile European economy.

The Portuguese bailout would push the total rescue bill for the eurozone’s clapped-out economies to almost €300-billion. In May, Greece accepted an emergency loan package worth €110-billion from the European Union and the International Monetary Fund. Six months later, it was Ireland’s turn; its bailout was valued at €85-billion.

Portugal’s rescue mission is expected to cost as much at €80-billion, though it may be several weeks before the loan size and conditions are known. The three bailouts have one aspect in common: In each case, their governments insisted repeatedly that none was needed, and in each case investors did not believe them.

The debt crises in each country have also proven to be politically deadly. Mishandling the economy ended the career of Greek prime minister Kostas Karamanlis in late 2009. His replacement, George Papandreou, was forced to launch aggressive government spending cuts in exchange for the emergency loans, triggering riots, protests and strikes across Greece as entitlements and wages were reduced.

In Ireland, Enda Kenny swept into power in March after voters held his predecessor, Brian Cowen, responsible for a debt and banking crisis that had plunged the country once known as the Celtic Tiger into a miserable economic recession, complete with housing bust.

Portugal’s Prime Minister, Jose Socrates, is another debt-crisis victim. He tendered his resignation on March 23 after parliament rejected his latest austerity program. Snap elections were called for June 5.

The political crisis heaped onto a debt crisis was instrumental in sealing Portugal’s fate as Europe’s newest financial cripple. Since the government collapsed, Portugal has been clobbered by a series of debt downgrades by the debt ratings agencies and ever rising bond yields. Earlier this week the rate on Portuguese bonds reached almost 10 per cent, close to triple the level paid by benchmark German bonds, which are considered Europe’s least risky debt.

Unlike previous bailouts to Ireland and Greece, Portugal’s rescue is not expected to rock the markets because it was fully expected by investors. They had been treating the tiny country’s bonds as increasingly high-risk purchases, demanding higher and higher rates to compensate for funding the debt. In essence, the soaring interest rates made it impossible for Portugal to fund itself.

To read more, visit: http://www.theglobeandmail.com/report-on-business/economy/portugal-seeks-bailout-as-eurozone-crisis-hits-third-nation/article1973580/

 

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