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business newsSaving Portugal -- and Spain?
By
Matthew Mallon
Apr 12, 2011 10:15 am
The Portuguese rescue has calmed markets fears for now. But Spain is still vulnerable, and interest rate hikes thicken the plot.
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For now, the market seems to be suggesting that the widely anticipated Portuguese rescue – estimated to amount to around 80 billion euros by the European Commission’s Olli Rehn – will be enough to satisfy it. There are still plenty of details to be worked out and issues to be dealt with, including the fact that the country is currently in political limbo, run by a caretaker government after Jose Socrate’s Socialist party lost a no-confidence vote at the end of March. The rescue package will be ready by mid-May, and the EU and the IMF, which will be ponying up a third of the funds, want assurances from all of the country’s political partners that they will abide by its conditions after the June 5 national election. This is a lesson they have learned in the aftermath of the Irish rescue last fall, which toppled the government that agreed to it and has seen a new administration aggressively seek renegotiation of terms.
Still, will bond vigilantes continue to be satisfied by this latest sacrifice? Or will they turn their attention to Spain? For now, the yield spread on Spanish 10-year debt has fallen to its lowest level since November, and investors have been cheered by Chinese pledges to keep on purchasing the country’s debt and to assist in funding the restructuring of the country’s troubled regional banking system.
But Spain is still vulnerable. Its sluggish economy grew by a mere 0.6% last year (compared to Portugal’s 1.2% growth), it has one of the eurozone’s highest unemployment rates – at 20.5% it’s twice that of Portugal’s, and it has a punishing budget deficit. “The notion that Spain is somehow different to Portugal is based on a somewhat fanciful belief that it is a more dynamic economy and is immune from speculative attack by virtue of its size,” wrote Guardian economics editor Larry Elliot in the immediate aftermath of Portugal’s bailout call.
Adding to the pressure is the European Central Bank’s tightening fiscal policy, which saw an increase in interest rates last week. Thanks to 2.6% inflation, caused in part by a super-heating German economy and recovery in other northern EU member states, there will be more to come. It’s troubling evidence that the widely disparate economic performance between the eurozone’s haves and have-nots may yet tear the region apart.
The interest on Greek, Irish, and now Portuguese bailout funds is linked to the ECB’s rate. Any rise increases the likelihood of default in those already overwhelmed economies, while higher borrowing costs will only place more strain on Italy and Spain, the too-big-to-fail members of the PIIGS.
Meanwhile, there remains the long-term question that looms over these rescues: Do they work at all? Neither Ireland nor Greece have seen much relief since the EU/IMF interventions. Both have suffered political and social turmoil. Both are hotly tipped for default. Now, as Portugal looks set to follow in their footsteps, with harsh austerity measures due to be imposed by its rescuers only adding to an already volatile domestic situation while severely hampering any chances of recovery for its stagnant economy, one can only wonder how much of a rescue this rescue will be.
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