The Irony Of EU Pressure On Portugal

Germany, France, and the IMF has recently put pressure on Portugal to accept financial aid from the EU. They are concerned that the bond market will turn on the small nation and drive yields on its sovereign debt so high that there will be a rush to bail Portugal out as was the case with Ireland and Greece.

A source told Reuters that “France and Germany have indicated in the context of the Eurogroup that Portugal should apply for help sooner rather than later.” All parties have denied the discussions to keep the international global markets from decisions that Portugal may default.

The irony of the move by the EU is that premature discussion of a bailout which is pressed on the nation before it has exhausted its other options will almost certainly cause a sharp increase in the fear that Spain or Italy could be the next victim of huge budget deficits and unsustainable debt. A push to force Portugal to take money could trigger a rapid rise in the amount that Spain will have to pay for its sovereign debt.

Portugal might be a firewall to effectively stop or at least mute concerns about contagion in the region. That is only true if Portugal has the chance to prove its case that it does not need money. The amount should be as modest as possible and be put into Portugal’s treasury on favorable terms if a rescue becomes a necessity. One of the concerns about the money loaned to Ireland and Greece is that interest rates they pay are still too high to be sustained by slow-growing economies in nations that will take years to bring down deficits which have ballooned to crippling levels.

A Portugal rescue becomes a self fulfilling prophecy if the large members of the EU seem to be in a rush to accomplish it. Concerns are increasing that a Portugal bailout could cost $100 billion. A bailout of Spain could cost three times that much. Portugal could be the domino that knocked Spain down. The EU probably cannot finance both nations immediately which makes the worries of international investors more reasonable

The EU needs to be careful that it may get what it wishes for. Portugal needs to determine its own financial future, even if that is only remotely possible and request any aid systematically. Otherwise, the panic about Europe will only spread.

Douglas A. McIntyre