Strategic Briefing | 3.24.2011 | Portugal: The Next Phase Of Euro Crisis

Portugal in crisis after prime minister resigns over austerity measures
Guardian | Mar 23
Portuguese prime minister José Sócrates has said he has submitted his resignation to the president after parliament rejected his minority Socialist government’s latest austerity measures. The loss of the vote “has taken away from the government all conditions to govern,” Sócrates said. It brings the country closer to needing a bailout.
Portugal bailout ‘could cost UK £3bn’
Guardian | Mar 23
“Portugal will inevitably ask for a bailout,” said Open Europe’s Raoul Ruparel. “But the cases of Ireland and Greece clearly illustrate that the EU’s strategy – to throw good money after bad – is failing. Rather than simply taking a bailout, it would be better in the long run for Portugal to restructure its debt now,” Ruparel added.
Merkel Says Socrates Was ‘Right’ to Push for More Portugal Cuts
Bloomberg | Mar 24
German Chancellor Angela Merkel said that Portuguese Prime Minister Jose Socrates did the right thing in putting a “far-reaching” program of austerity measures to parliament. Merkel, in a speech to lower-house lawmakers in Berlin today, said that Socrates had been “right and courageous” in presenting an additional round of budget cuts, and that she was “grateful” to him for taking responsibility for his country’s finances.

New Phase in Europe Crisis
The Wall Street Journal | Mar 24
Portugal’s crisis will be at the forefront of the agenda of an EU summit meeting in Brussels on Thursday. European leaders have spent recent months cobbling together a comprehensive package they hope will solve once and for all the euro zone’s debt crisis. Thursday’s meeting is expected to settle a new post-2013 bailout fund, able to lend €500 billion, or about $710 billion, and an accord to improve countries’ competitiveness. But a decision on enlarging the lending capacity of the current bailout fund beyond its roughly €250 billion has been put off.
Portugal in crisis, unlikely to seek bailout at summit
Reuters | Mar 24
The resignation of Portugal’s prime minister will dominate a summit of EU leaders on the European economy on Thursday and Friday, with pressure intense on Lisbon to seek a bailout package. Prime Minister Jose Socrates resigned on Wednesday after parliament rejected his government’s latest austerity measures aimed at avoiding EU financial assistance. But he said he would still attend the two-day summit in a caretaker capacity. Socrates remains adamantly opposed to requesting EU/IMF aid and has made it clear he intends to hold that line, at least until a new Portuguese government is formed in the weeks ahead. That leaves Portugal in limbo, but the likelihood remains that a bailout will have to be taken in the end.
The death of Sócrates
The Economist | Mar 23
Portugal’s political turmoil and its urgent need for a rescue will create new problems at the EU summit, which is due to sign off on an effective expansion of the bail-out fund and a German-led “pact for the euro”. If EU leaders agree to bail out Portugal, they may find they have already used quite a big chunk of their fund. Judging by experience, the markets will then move on to attack the Spanish. The bail-out fund can easily finance Portugal. But it is not clear that it could deal with Spain.
Portuguese vote stokes Europe debt concerns
Washington Post | Mar 23
“Portugal is essentially doomed,” said Jacob Kirkegaard, an analyst at the Peterson Institute for International Economics who has followed the European debt crisis. “They cannot finance themselves.” Portugal’s economy is small, and it does not have the extensive banking system or other global ties that would make its crisis an immediate cause for broader concern. But the resolution of Portugal’s problems will be important in determining whether the euro area puts a lingering debt crisis behind it and adds to the world recovery with a stronger outlook for growth, or whether it remains under a cloud of possible sovereign default. More significant European economies such as Spain, Belgium and Italy also have high levels of public debt. Although analysts say it is unlikely that any will need international help, the situation is volatile. Spanish banks have about $100 billion at risk in Portugal, the type of transnational “exposure” that could allow problems in Portugal to spill beyond its borders.
Spanish Banks Hit by Moody’s
The Wall Street Journal | Mar 24
Iberian bank shares are expected to drop after the market opens Thursday, following a downgrade of the Spanish sector by Moody’s Investors Service Inc. and the collapse of Portugal’s minority government overnight. Moody’s said its downgrade comes after a similar move on Spain’s sovereign debt earlier this month, and reflects heightened financial pressures on Spain’s sovereign credit and that of “many” weak banks, and decline of the systemic importance of smaller banks amid quick consolidation in the sector, and the expectation of a weaker support environment for banks across Europe.
Socrates quits, no deal of EFSF, no deal on Irish rates, anger over Merkel – another fine mess
EuroIntelligence | Mar 24
Not looking too good. Irish spreads now at over 7%, Portugal’s at 4.6%. While Portguese ten-year bond yield 7.6%, five year bonds are now over 8%. The financial markets are not expecting any relief from the summit .
Europe Re-Divided?
George Soros (Project Syndicate) | Mar 21
The so-called euro crisis is generally seen exclusively as a currency crisis, but it is also a sovereign-debt crisis – and even more a banking crisis. The situation’s complexity has bred confusion, and that confusion has political consequences. Indeed, Europe faces not only an economic and financial crisis, but also, as a result, a political crisis. The various member states have forged widely different policies, which reflect their views rather than their true national interests – a clash of perceptions that carries the seeds of serious political conflict.