As Portugal’s debt crisis steepened after parliament rejected austerity measures that were required by the temporary rescue fund established in May 2010, EU leaders have agreed to create a permanent fund to bail out nations plagued by ongoing sovereign debt problems.
EU Meeting in Brussels
Reporting for The Washington Post, ("Europe wrestles with debt crisis," 03/25/11), Anthony Faiola writes that EU leaders currently meeting in Brussels have agreed to set up a larger, permanent rescue fund. However, “the escalating problems in Portugal…underscored the still unsettling financial problems gripping [the euro zone.]”
The EU has indicated Portugal could be backstopped with a $100 billion rescue package; provided, however that the Iberian nation agreed to adopt severe austerity measures. But parliament’s refusal to adopt these measures on March 23rd triggered a political crisis that forced Prime Minister Socrates to resign. The WaPo story relied on a comment from a senior fellow at the Brussels-based think tank, “Bruegel.”
“Portugal is a country living above its means, and it is going to have to change a number of its ways,” said Andre Sapir. “What it needs to do ultimately and what any E.U.-IMF program is going to be about is not just austerity, but a whole series of measures to change its economic course.”
As it has been previously reported, Portugal’s economy has remained “stagnant” and “uncompetitive” while the government continued to expand its sovereign debt to fund social entitlements similar to Greece, a nation that was forced to adopt austerity measures late in 2010 to bring that nation back from the brink of economic collapse.
But the Portuguese parliaments’ failure to adopt austerity measures has jeopardized the nation as it will need to meet $12 billion in debt obligations, according to The Washington Post article.
More importantly, the rating agencies S&P and Fitch, have slashed the rating of Portuguese debt to slightly above a junk bond grade which, in turn, has prompted lenders to hike interest rates being charged to Portugal to borrow funds on the EU capital markets which will ultimately require Portugal to cut “pension, healthcare and infrastructure spending, leaving political parties scrambling to forge a new coalition or call new elections."
Meanwhile the London Telegraph reported that British Prime Minister David Cameron urged EU leaders at the Brussels conference to bail out Portugal in order to stop a widening currency crisis in the euro zone. "My agenda is to get Europe working," said Mr. Cameron. That being said, Britain is not in the euro zone and so its exposure to the widening sovereign debt crisis should not be significant even though bilateral trade between Lisbon and London was just £4bn in 2010, according to The Telegraph (Portugal Debt Crisis: David Cameron holds talks with EU leaders, 03/26/11).
The European summit in Brussels was initially aimed to create emergency policies in the event of a future crisis over the euro, including bailout mechanisms. However, EU officials contend that rapidly devolving events in Portugal would hamper any firm resolutions. In the final analysis, Germany will continue to be the leader as the EU continues to grapple with the lingering debt crisis.
While German Chancellor Anrdea Merkel has previously stated that a taxpayer-funded system could possibly violate a clause in the EU's fundamental treaty against bailouts, and that any permanent bailout fund should force bondholders like banks and investment funds to be make good on sovereign debt holdings if a country defaults, the ultimate cost for bondholders remains unclear.
One this that is clear is this: as EU leaders continue to work through its sovereign debt crisis, global markets continue to be affected as lingering economic problems and related monetary easing policies currently being implemented by the U.S. Federal Reserve demonstrate how tightly connected the global capital markets have become.
Kyle Colona - Kyle Colona is a freelance writer from the New York area with an extensive background in legal and regulatory affairs.
