Portugal’s government collapsed Wednesday after the parliament rejected a budget-cutting plan, pushing the country closer to an international bailout and triggering another test of Europe’s ability to deal with an ongoing public debt crisis.
The developments occurred in advance of a summit Thursday at which European leaders were expected to approve an economic program they hope will convince world markets that the 17 nations that share the euro will stand behind each other, better coordinate economic policies, and guarantee that none will default on their loans.
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March 24 (Bloomberg) -- Holger Schmieding, chief economist at Joh Berenberg Gossler & Co., talks about the outlook for an international bailout for Portugal and the capital levels of Spanish banks. He speaks with Francine Lacqua on Bloomberg Television's "On The Move."
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Greece sneezed, and now most of Europe has a cold. The European debt crisis has already spread like a virus, and other countries are now at risk.
Instead, the European leaders will meet amid a new round of uncertainty. Strapped for cash and mired in slow economic growth, Portugal must raise $6 billion or more next month, and it faces high interest rates demanded by investors who are not confident in the government’s ability to pay. After the resignation Wednesday of Socialist Party Prime Minister Jose Socrates, the country will be forced to go to the market in the middle of an election campaign — with no guarantee that an incoming government will make the reforms likely to be demanded by the International Monetary Fund or other European governments in return for financial help.
Interest rates on Portugal’s 10-year bonds have increased nearly 50 percent since autumn to an unaffordable 7.6 percent as of Wednesday. Analysts say the country is increasingly likely to become the third eurozone nation to need a bailout in the past year, after Greece last spring and Ireland in the fall.
“Portugal is essentially doomed,” said Jacob Kirkegaard, an analyst at the Peterson Institute for International Economics who has followed the European debt crisis. “They cannot finance themselves.”
Portugal’s economy is small, and it does not have the extensive banking system or other global ties that would make its crisis an immediate cause for broader concern. But the resolution of Portugal’s problems will be important in determining whether the euro area puts a lingering debt crisis behind it and adds to the world recovery with a stronger outlook for growth, or whether it remains under a cloud of possible sovereign default.
More significant European economies such as Spain, Belgium and Italy also have high levels of public debt. Although analysts say it is unlikely that any will need international help, the situation is volatile. Spanish banks have about $100 billion at risk in Portugal, the type of transnational “exposure” that could allow problems in Portugal to spill beyond its borders.
The outlook is murky for Greece and Ireland, despite the rescue packages provided by the IMF and other eurozone countries. Nearly a year into its IMF program, Greece is behind on some of its economic restructuring targets, and some analysts say the country might default on its debts. Ireland says it needs lower interest rates on the loans that other European countries provided last year, but it has refused conditions they want to impose, including an increase in the country’s regionally low corporate tax rate.
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