The bailout of Greece is virtually assured because the Germany parliament has approved funds for the action. The International Monetary Fund and other European Union nations also have assured participation. And private investors have agreed to take a sharp cut in the value of their paper. This has prompted S&P to say the nation is in “selective default.”
The next nation in the region that is in trouble, or is supposed to be, is Portugal. A restructuring of its debt may not be a matter of contagion. The country may have financial difficulties it cannot resolve.
One factor is in Portugal’s favor, though. Its cost of borrowing has dropped, although that cannot be sustained. Six-month notes maturing in July carried a yield of 4.463%, down from 4.74% a month ago. Banks that have borrowed from the European Central Bank may support Portugal’s debt.
But Portugal is in the midst of a recession. If many economists are right, austerity measures will make the downturn worse as the government withdraws whatever support it may have given the economy. Unemployment in the country is 14%. While that is not as high as Spain’s 21%, it still puts a large drag on consumer spending and the need for the government to offer some of these people financial support. A sign of how joblessness has gotten out of control is that unemployment was “only 10.1%” in the fourth quarter of 2010. It is likely that many people in Portugal have stopped looking for work, if the data from other countries holds true in Portugal.
Portugal may have every intention of cutting its expenses to the bone. It may have no inclination whatsoever to take bailout money. It almost certainly does not want the shackles put on the Greek government to be put on it. However, the weight of its economic downturn may force the nation to join Greece in the penalty box.
Douglas A. McIntyre