Friday, February 25, 2011

Portugal Bailout Only a Matter of Time

« IMF Managing Director Dominique Strauss-Kahn (left) and ECB president Jean-Claude Trichet talk at EU headquarters in Brussels. Analysts are convinced Portugal will be next to need bailout assistance.
(Georges Gobet/AFP/Getty Images)
Even though Middle Eastern news dominates the headlines, Europe’s financial crisis has not gone away.
Almost all analysts agree that Portugal will soon have to ask for a bailout from the European Union. “Europe is sitting on an active volcano,” writes Richard Barley in the Wall Street Journal.
“Economists and bond analysts have little doubt that rising bond yields will eventually force Portugal to seek financial aid, as did Greece and Ireland,” writes Reuters. “Analysts are practically unanimous that a bailout is a reality which Portugal will have to face in the end” (February 19).
The European Central Bank (ecb) spent €711 million on debt from eurozone countries last week as it attempted to help debt-laden nations to continue to borrow affordably. The Financial Times reports: “Rumor has it the majority of bonds were Portuguese.”
If it weren’t for the ecb’s help, Portugal would have probably needed a full bailout package already. J.P. Morgan estimates the ecb has bought between €16 billion and €17 billion of Portuguese debt since last May—nearly all of the debt that Portugal has issued during that time.
Societe Generale estimates that the bank owns 15 percent of Portugal’s debt.
Compounding Portugal’s problem, it cannot pay its debt back evenly over time. Instead, large chunks of it are due all at once. On March 18, it has to pay back debt worth nearly 2 percent of its total economy. Then on April 15, it has to pay back 2.7 percent and two months later, 2.9 percent.
That’s it for 2011—but should Portugal make it past June, it has even larger chunks of debt to pay back in 2012. Belgium is in a similar situation.
Portugal seems to be playing for time. “Portugal may not be able to avoid seeking an international bailout, but it can afford to wait until an EU summit in late March, or longer, in the hope that Europe will offer a more generous rescue scheme to indebted states,” writes Reuters (op. cit.).
“Analysts think one possible measure in the EU’s package that could persuade Portugal to take a bailout would be an offer of a flexible credit line with conditions, instead of a full-scale bailout that would imply intervention by the European Union, the International Monetary Fund and the European Central Bank,” it continues.
Portugal had to be rescued by the imf in the 1980s, and it was painful. If it hangs on long enough, it may be able to avoid imf involvement, but you can be sure that Germany will still have strict conditions for loaning out any money.
Portugal has to offer an interest rate of above 7 percent to persuade creditors to lend it money. “I can’t really see them going significantly lower in the near future, considering the economy,” said Diego Iscaro, economist from ihs Global Insight. While he was unsure exactly when a bailout would take place, “given the high rates they have to pay, I expect it to happen,” he said.
Portugal’s position is not sustainable. Many European nations are still heading toward an economic meltdown that will force them to hand over power in exchange for financial security. Each eurozone economy that fails brings eurozone countries closer to central control by Europe’s chief bailout banker—Germany.