Thursday, April 7, 2011

Bailout requested - what now?

Bailouts are not the only thing the Portuguese and the Irish have in common. Both peoples can be darn stubborn. That is sometimes a beneficial trait, but it was somewhat embarrassing watching the former prime minister, José Sócrates, having to announce on television last night that Portugal needs a financial rescue package. He had spent months digging his heals in, saying such a measure was neither needed nor wanted. He was one of the very few people in economic circles who didn't think it inevitable.

What now? Details of the bailout have yet to be discussed. The request will be processed “in the swiftest possible manner, according to the rules applicable,” says the president of the European Commission, Manuel José Barroso. As a former Portuguese prime minister himself, Barroso said he had “confidence in Portugal's capacity to overcome its present difficulties.”

That is easy enough to say, of course. Now that the country's debt crisis has spiralled out of control, the Portuguese government will have to agree to tough austerity targets in return for a bailout. But who are the decision-makers going to be in the negotiating process? The country only has a caretaker government at present. The general election is still eight weeks away.

Greece needed 110 billion euros; Ireland needed 85 billion. Portugal may need a bit less, but it could be as much as 75 or 80 billion – not that a few billion here or there makes much difference to your average Portuguese man or woman who earns less than a thousand a month and can't possibly get their head around a million let alone a billion.

Even with a rescue package from the EU and the IMF on the way, the problem certainly doesn't end there. Portugal's economic, political and social problems are such that the country has a massive uphill struggle ahead.

And for the eurozone as a whole, things could get a whole lot worse. It remains to be seen if Portugal's bailout request satisfies the all-important bond markets. The fear is that the domino effect will now move to the very much bigger economy in neighbouring Spain.

Rising interest rates could have a devastating impact on Spain's trillion euro economy. The worry is that Spain, which, unlike Portugal, has suffered a huge decline in house prices and has unemployment running at far more than twice that of Portugal, may be too big to bailout.

This may be taking the doom and gloom scenario a bit too far. The Goldman Sachs Group are saying today that Portugal is likely to be the last euro country to seek an international bailout.

1 comment:

  1. The only thing Jose Socrates has ever said that made any sense was to say that Portugal does not need the bailout. Socrates eventually gave in to outside pressure I presume and requested the bailout. What Portugal really needs is to remove itself from power grabbing European Union and loose the sinking ship called Euro.

    How can it make any sense a country that has so much debt to ask for yet another loan to pay off its debt. If we were thinking of destroying Portuguese sovereignty then this the right thing to do.

    Let's hope Finland does the right thing.