Buying time is expensive
A bail-out for Portugal may not solve its problems
By R.A. | LONDON
Portugal moved closer to external aid after Prime Minister Jose Socrates's offer to resign left his government in limbo on the eve of today's European Union summit to address the region's debt crisis. Two-year Portuguese bond yields reached the highest since 1999. The government retains its powers for now before President Anibal Cavaco Silva meets tomorrow with the main parties to resolve the political crisis or call elections.
German Chancellor Angela Merkel praised Socrates today for putting “far-reaching” austerity measures to parliament, which rejected the package last night. The vote prompted him to tender his resignation and moved the nation closer to following Greece and Ireland in requiring a bailout.
The bail-out's likely size would be between €50 billion and €70 billion euros. The excerpt above mentions that Greece and Ireland have already gone down this road. At present, their bond yields are higher than Portugal's.
It seems clear that Greece is insolvent, and Ireland probably is too. Portugal is more of a bordernline case, but it's becoming less do by the day. Angela Merkel is demanding austerity in exchange for a bail-out; well, the government just revised down expectations for the economy this year. It now says that Portugal's economy may shrink by 0.9% in 2011, where before it was expected to grow at a 0.2% pace. Austerity will likely slow the economy further, reducing Portugal's ability to pay its debts. And remember, the European Central Bank is about to raise interest rates.
There are several big problems to handle here, but one big one is obvious—Greece, Ireland, and Portugal are probably all busted. They simply can't meet their obligations. Their debt will almost certainly need to be restructured. The euro zone isn't excited about doing this now, partially because it's worried about its banks and partially because it's hoping it won't come to that. But default looks inevitable.
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