Caretaker govt’s bailout request may total euro 80 bn; fear of Spain falling next.
Portugal has become the third domino, after Greece and Ireland, to be toppled by Europe’s ongoing sovereign debt rot. The caretaker government in Lisbon asked for an emergency European Union bailout late on Wednesday.
The request held little surprise. The inevitability of a Portuguese bailout has long been accepted by Brussels (headquarters of the European Union) and the European Commission president, José Manuel Barroso, announced the request would be “processed in the swiftest possible manner”.
On top of its fiscal woes, Portugal has been beset with political troubles. The government headed by José Sócrates was brought down on March 23, after failing to pass an austerity package that he’d insisted would help avoid a bailout. Since then, Portugal and its banks saw their credit ratings downgraded and the country’s borrowing costs soared to successive euro-era highs for 11 consecutive days.
On the day that Mr Socrates sought EU help, Portugal had been forced to pay an interest rate of 5.9 per cent to raise euro 1 billion in one-year debt.
It is not known how much aid Portugal has asked for. Negotiations will now begin in Brussels, but analysts say the figure could touch euro 80 billion. But until a new government in Portugal is elected, it is unlikely a full Greek- and Irish-style rescue agreement will be announced, given that the current caretaker administration lacks the authority to negotiate a final package.
Instead, Sócrates is expected to bargain for some form of interim aid that will se Portugal past two big financing hurdles on April 15 and June 15, when it has to pay a total of euro 12 billion in bond redemptions and interest payments.
Regardless of the details, it’s certain that years of low growth and austerity are in store for Portugal, the price that Germany and other fiscally well-off euro zone nations will exact in return for any bailout.
Hours after the request, attention was already shifting east of Portugal to its Iberian neighbour, the far larger and weightier economy of Spain. The focus is now on whether the Portuguese rescue will become a firewall between the debt crisis of the euro zone’s PIG (Portugal, Ireland, Greece) grouping or whether Spain will join the porcine triumvirate to make it a plural PIGS.
This morning, Spanish economy minister Elena Salgado hastened to distance the country from Portugal, insisting the risk of contagion was “absolutely ruled out... it has been some time since the markets have known that our economy is much more competitive”.
While Spain has undertaken a few dramatic reforms in recent months to try and ensure it stays out of trouble, analysts remain worried because Madrid has a lot of debt to issue in the coming weeks and even a short-term loss of investor confidence could cause problems for the country.
Spain continues to suffer from high unemployment, with more than a fifth of the population out of work. It has just cut its 2012 growth forecast from 2.5 per cent to 2.3 per cent – and its 2013 prediction from 2.7 per cent to 2.4 per cent – ahead of an expected rise in the euro zone’s interest rate.
