Global Policy Forum

Portugal Seeks EU Bailout Due to Debt Crisis

The Portuguese government has asked for a bailout from its growing debts.  Portugal, the third Eurozone country to face economic crisis, is asking for assistance from the European Commission, IMF and Europe’s bailout fund. This article anticipates the estimated bailout costs and ramifications for the Euro as a result of Portugal’s default.

By Larry Elliott, Heather Stewart, Simon Goodley

April 6, 2011

Portugal's prime minister has said his country will ask for a bailout due to its high debts and difficulty raising money on international markets.

Prime Minister Jose Socrates said "the government decided today to ask the European Commission for financial help".

Portugal becomes the third financially troubled eurozone country after Greece and Ireland to request assistance from Europe's bailout fund and the IMF.

Analysts expect Portugal will need up to €80bn. A bailout had long been expected as Portugal, one of the 17-nation eurozone's smallest and weakest economies, struggled to finance its economy.

The move came as fears grew of a fresh debt crisis for weak countries on the fringes of the single currency zone as the European Central Bank prepared to start raising interest rates from the emergency level plumbed during the financial crisis.

The euro rose on the foreign exchanges on Wednesday in expectation that the European Central Bank would raise borrowing costs from 1% and signal further policy tightening in the months ahead.

But City economists warned that the interest rate rise would add to debt servicing costs and prove more problematic for countries such as Portugal and Ireland than for the core single country nations of Germany and France. Ben May, of Capital Economics, said: "If interest rates were to rise in line with market expectations, their impact would be greatest in the periphery and may prompt a further escalation of the region's fiscal crisis.

"Higher official interest rates will not only lower economic growth in the periphery, but will also prompt the average interest rate that governments pay on their debts to rise. Other things equal, then, higher interest rates will increase the chance of peripheral government debt spiralling out of control."

Along with other central banks, the ECB slashed interest rates during the financial crisis in an attempt to pull Europe out of recession, but it has responded to rising inflation in recent months with clear signals that borrowing costs will rise. The euro's strength coincided with a rise in the price of gold to $1,454.84 an ounce.

Marchel Alexandrovich, of Jeffries International, said a 1% increase in ECB rates would mean that mortgage debt interest payments of euro area households would rise by around 7% on average, but there would be a 30% jump in debt services payments for households in Portugal and Finland, a 15% increase in Ireland and around a 10% rise in Spain and Italy.

"In aggregate, debt interest payments for the euro area households and non-financial corporations would rise by around 0.3% of GDP if ECB rates are one percentage point higher," he said. "But Germany and France would see a rise of just around 0.1% of GDP, while Portugal, Spain and Ireland would see increases equivalent to 0.8% of GDP.

"The countries which least welcome higher interest rates on economic fundamentals are likely to be the ones most affected by them. One more reason why the ECB would be wise to tread very carefully in the months ahead."

Several of Portugal's banks have been calling on the government to accept help from its eurozone partners, warning that they can no longer continue to buy up Portuguese debt. Lisbon needs to find almost €5bn in repayments this month and another €27bn in June. The rising interest rate on Portuguese borrowing has added to the sense of crisis in the eurozone, amid reports that Greece is under pressure from the International Monetary Fund to default on its borrowing. The Irish government is understood to be concerned about weaker-than-expected tax revenues and the vulnerability of its banking sector. An informal meeting of European finance ministers is planned for Friday.


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