Another one down: Portugal requests bail out

[Alan]

ANOTHER domino has fallen in the eurozone debt crisis. After Greece and Ireland, Portugal has become the third debt-laden economy on Europe’s periphery to request a financial rescue.

European Union leaders have breathed a sigh of relief. Olli Rehn, the EU’s top economic official, said it was a “responsible step for securing the financial stability of the euro zone”. José Manuel Barroso, a former Portuguese prime minister who is now president of the European Commission, said the request would be “processed in the swiftest possible manner”.

But Portugal, facing years of austerity and low growth, may not be inclined to join in the general rejoicing. Spain, lacking the firewall that Portugal had previously provided, could be feeling distinctly uneasy.

Markets have so far given Spain the benefit of the doubt, appreciating decisive deficit-cutting measures implemented by José Luis Rodríguez Zapatero, the country’s Socialist prime minister. But investors may grow more sceptical when they begin to examine Spain’s troubled savings banks more carefully, noting that the government also runs a bigger budget deficit than Portugal.

José Sócrates, Portugal’s outgoing prime minister, who belligerently resisted a bail-out for almost a year, blamed his eventual capitulation on the centre-right Social Democrats (PSD), the main opposition party. By refusing to support the minority Socialist government’s fourth austerity package, he said, the PSD had precipitated a political crisis that forced him to resign on March 23rd, triggering an early election on June 5th.

Portugal and its banks had since seen their credit ratings downgraded to “dangerous” levels, Mr Sócrates said. The country’s borrowing costs soared to successive euro-era highs for 11 consecutive days. Shortly before he announced in a brief televised address on Wednesday night that he had asked the EU for help, Portugal had been forced to pay what analysts said was a “prohibitive” interest rate of 5.9% to raise €1 billion ($1.43 billion) in one-year debt.

Pedro Passos Coelho, the PSD leader and favourite in the polls to become the next prime minister, said the request for aid had come too late, but that he would support it nevertheless.

The outgoing government has not specified how much or what type of aid it has requested. But it is unlikely, yet, to be a full Greek- or Irish-style bail-out agreement supported by the European Financial Stability Facility and the IMF.

Only the new government chosen in the election will have the authority to negotiate a “more substantial” aid package of that nature, according to Mr Passos Coelho. In the meantime, Mr Sócrates is expected to negotiate some form of interim aid that will see Portugal past two big financing hurdles on April 15th and June 15th, when it has to pay a total of €12 billion in bond redemptions and interest payments.

Mr Sócrates has thrown in the towel, but Portugal knows from the example of Greece and Ireland that its problems are far from over. João Leite, head of investment at Portugal’s Banco Carregosa, said the request for aid was unlikely to lead to any significant reduction in the country’s long-term debt yields.

More importantly for voters, the austerity measures that Europe’s fiscally conservative governments will demand as a condition for aid can be expected to bite much harder than those Mr Sócrates pushed through. On top of all this, the Portuguese will have to endure two months of election campaigning by politicians whose credibility with many voters has fallen as low as the country’s credit standing in bond markets.

http://www.economist.com/blogs/newsbook/2011/04/europes_debt_crisis


Next up Spain....

 

[boramk]

The bankruptcy of Germany..

 

[Alan]

Indeed Germans going to have to cough up yet again....

 

[boramk]

Wow the EU was a terrible idea

 

[Kosmik]

I have no sympathy for Portugal even though it affects me more directly than most. People need to wake up, get off their asses and do some work!

 

[Alan]

Hope the Americans are paying attention. They're at a crossroads now between a Eurocentric president breaking records in deficit spending and those trying to keep the country solvent.

A credit rating agency said Thursday the chances of the United States defaulting on its debt remains "extremely low" even as Congress faces a fight over increasing the debt limit in coming weeks.

According to Fitch Ratings, the stakes are simply too high for lawmakers to fail to raise the $14.3 trillion ceiling before the government defaults on its debts.

"Ultimately, the recognition of the dire consequences of failing to raise the debt ceiling in a timely manner will prevail over differences on the more fundamental issue of how best to place U.S. public finances on a sustainable path over the medium- to long-term," the firm said in a statement.

The Treasury Department has informed lawmakers it expects to hit the limit by May 16 and would end up defaulting on its debt by July 8, after exhausting all options to stave off that event — one Treasury Secretary Timothy Geithner has warned would be "catastrophic."

In fact, Fitch said the larger threat to the nation's "AAA" credit rating — the highest possible — is if lawmakers cannot agree on a broader plan to get the federal deficit whipped into shape.

"The brinkmanship over the debt ceiling and the 2011 budget will be resolved. Of greater threat to U.S. financial stability and its 'AAA' status would be the failure to agree on a credible medium-term fiscal consolidation strategy as economic recovery becomes more secure," said David Riley, head of sovereign ratings at Fitch.

If the federal government fails to reduce that deficit and control its public debt, it could weaken investor confidence in U.S. debt, which in turn would have an adverse impact on that top rating.

Geithner has tried to impress upon lawmakers the importance of raising the debt limit, warning that if the government hits it, eventually it would no longer be able to issue debt to meet previous obligations. That failure could result in a default on U.S. obligations for the first time in history, which would shake confidence in financial markets and lead to higher borrowing costs across the country, he has warned.

$14.3 trillion!!!

 

[Nom Chompsky]

Yet another fail.

As predicted many months ago by the more decent newspapers in the UK.

European integration....the creation of socialists and now the poor Europeans are living with the consequences of it.

 

[Alan]

Now Chris it's the politicians not the system. We've already had Kosmik saying people actually have to work. All this may be just too much for grayston and w1z4rd to bare

 

[Alan]

Speaking on Jeff Randall Live, Martin Callanan, the leader of the UK's Conservative MEPs, argued that the Government should block proposals to help rescue the debt-ridden nation with cash held under Article 122 of the Lisbon Treaty.

"There is a question of legality about that fund. It was approved under what's called Article 122 of the Lisbon Treaty and that was a section that was inserted into the Lisbon Treaty to deal with natural disasters or events beyond a country's control," he said.

"I don't think this is a natural disaster or an event beyond Portugal's control, ergo it's illegal. The UK, in my view, should refuse to contribute towards this fund and should if necessary challenge the legality of it."

Mr Callanan insists Portugal's problems have come about because of its government's poor fiscal and economic policies and the failure to liberalise its markets.

His comments came in response to estimates that any potential UK element of the bailout could be between £3bn and £5bn.

Mr Callanan also said that the European Financial Stability Fund could easily cover the cost of bailing out Portugal, thought to be more than £60bn.

Chancellor George Osborne has claimed the bailout proves he was right to cut Britain's deficit.

The rescue is expected dominate discussions being held between EU finance ministers in the capital of Hungary, Budapest.

SKY

 

[TheHiveMind]

Wow the EU was a terrible idea

The EU was a good idea, implemented very badly. Almost noone followed the regulations, and they all agreed to look the other way.

 

[Nom Chompsky]

The EU was a good idea, implemented very badly. Almost noone followed the regulations, and they all agreed to look the other way.

The EU should have simply stayed as an 'economic union' imo. In other words, an arrangement whereby European countries trade goods amongst themselves and no taxes are imposed on such goods.

Once the EU became political (European Court of Human Rights etc. (unelected judges) and imposing stupid regulations) and a full-on monetary union (I think that's what it is called when countries adopt a common currency) then it [the EU] lost its way.