What Comes After the Bailout of Portugal

By: Inoljt, http://mypolitikal.com/

Sometimes reviewing past news events can yield unexpected irony. Here, for instance, is the New York Times’ page on Portugal News. The second-to-last article, dated on January 12th is titled, Portugal Says It Needs No Bailout and Won’t Seek One. After that there is a series of optimistic articles titled, respectively, Portugal’s Bond Sale Better Than Expected, Bond Sale A Success In Portugal, Optimistic Outlook Eases Portugal’s Borrowing Costs.

Two days ago, however, came this gem: Portugal to Ask Europe For Bailout.

This bailout comes after the previous bailouts of Greece and then Ireland. The European Union has detailed a bail-out fund of approximately one trillion dollars, which can be lent to countries at lower than at-market interest rates. Originally this was meant to stop the market panic over the European sovereign debt crisis. To some extent it has succeeded in alleviating the panic.

On the other hand, it has obviously failed to contain the contagion to Greece alone.

By itself Portugal is not too big of a problem for the fund. Its economy is smaller than Greece’s; so is its population. The fund will be able to deal with Portugal, as it did with Greece and Ireland.

The question is, however, what comes next. With the bailout of Portugal, all eyes are looking towards Spain. This is the market’s next target.

A bailout of Spain would be a magnitude more difficult than the previous bailouts. Its economy is far bigger; more than a trillion dollars in GDP. This is four to five times bigger than Greece. It has a population of 46 million, several times that of Greece.

It would be very difficult and extremely expensive to rescue Spain’s 1.4 trillion dollar economy, unlike the relatively cheap rescues so far enacted. The bailout might perhaps or probably be impossible.

In other words, the eurozone has almost reached the end of its line. In the summer of 2010, during the height of the Greek crisis, analysts worried not about Greece but about Spain (and Italy after Spain). Spain was the big fish, the debt-ridden country in a recession big enough to pull down the euro. The fear was that Greek bankruptcy would set off a chain reaction, moving from Greece to Ireland to Portugal and finally to Spain.

Well, Greece, Ireland, and Portugal have asked for a rescue, and it has come down to Spain. Spain must not fall.

 

 

Tags: bankruptcy, Euro, Europe, European sovereign debt crisis, Portugal, spain (all tags)

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