The writing has been on the wall for quite some time now and we have seen the usual knee-jerk reaction of a cash bailout. The markets settled within hours of this being announced.
Portugal’s outgoing government was of the firm belief that it could avoid a bailout. In fact, the government had been resisting pressure to do so for over a year. It was only when a crucial vote for a three-year raft of austerity measures collapsed in parliament the other week that the lawmakers admitted defeat.
The government needed the backing of the Portuguese House to press ahead with reforms, but once this did not materialise, the Prime Minister resigned. Market panic ensued and within days, Portugal simply could not afford to borrow off the commercial markets at rates which were anything close to being sustainable.
As a result, the civil servants who are administering Portugal in the run-up to the 5 June election, have admitted that the country does need to tap into the eurozone stability mechanism fund.
In doing so, a safety valve went off and market pressure immediately eased by about five percentage points, in anticipation of a capital injection. Portugal is the third eurozone country that has admitted that it needs a bailout. Experts can call it whatever they like, but at the end of the day, a bailout is what it is.
One always has to remember that these bailouts – afforded to Greece, Ireland and now Portugal – are in fact loans. The beneficiaries of those loans will still have to pay the money back, and at commercial rates. The only difference is that the interest rates will be set at a rate that can allow the country to plan for its recovery.
To put this into context, it must be understood that Portugal needs to bring its deficit in line with Maastricht criteria – that is 3% of Gross Domestic Product. In turn, it must also reduce its public debt to bring it down to 60% of GDP.
An emergency summit will probably be convened within the next few weeks to discuss the matter. In reality, it will be a case of crossing the T’s and dotting the I’s in relation to Portugal, while the more serious matter of Spain is brought up.
Spain is the fourth largest economy in the EU. The EU has always maintained that it could afford to bailout Greece, Ireland and at a push, Portugal. Spain was always going to be a loan too far. In the meantime, the Iberian nation rushed to declare that it would not be following suit behind Portugal. The government believes in the austerity plan it has implemented. But, with unemployment hitting 20% and rising, and deficits likely to end at 6.6% of GDP rather than the government’s 4.4% projection, uncertainty will be the order of the day, at least in the near future, as Prime Minister Zapatero has already declared that he will not seek another term in office.