Politeía Digest

Quis custodiet ipsos custodes?

Portugal Pleads for Rescue

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By Patricia Kowsmann and Charles Forelle

LISBON—Running out of money and paralyzed by a political crisis, Portugal said Wednesday it would ask the European Union for a financial bailout—setting up a crucial test of the bloc’s emboldened efforts to contain its sovereign-debt crisis.

Portugal is the third nation in the 17-member euro zone to turn to its peers for help, and one that has long been seen as a firewall between small economies whose bailouts are painful but manageable and large economies—like Spain—whose infection would set the crisis on a far darker course.

After days of pressure in financial markets, Prime Minister José Sócrates told Brussels authorities Wednesday that he needed help, and late that evening broke the news to his countrymen in a televised address.

It has appeared inevitable for weeks. Portugal has struggled to raise cash from wary financial markets, and its persistent deficits are draining state coffers.

Politics are at a standstill: Two weeks ago, Mr. Sócrates’s government collapsed after parliament rejected his latest bid to rein in Portugal’s budget. Mr. Sócrates had adamantly refused to countenance a bailout. Wednesday night, he said he had no choice.

“It is time to assume the responsibility to the country,” Mr. Sócrates said in his speech. “It is in the name of national interest that I tell the Portuguese people that we need to take this step.”

European policy makers fervently hope their efforts to shore up the euro zone mean Portugal will be the last country to ask for aid.

Last year, European leaders dithered for months before bailing out financially troubled Greece. But in the meantime they’ve created a temporary bailout fund and laid the groundwork for a permanent rescue vehicle. When Ireland stumbled late last year, a €67.5 billion ($96 billion) lifeline was quickly negotiated.

For now, the relatively smooth turning of the bailout machinery has paid a significant dividend: Spain, which markets once feared would follow Portugal, has seen its reception grow warmer. As Portugal wobbled over recent months, investors dumped Portuguese debt but held on to Spanish debt.

“There is little to suggest that the Portuguese bailout that has been imminent for some time now will infect Spain,” said Sony Kapoor, managing director of Re-Define, a Brussels-based economic think tank. “Spain is by far a stronger and more dynamic economy that despite ongoing problems should be fundamentally sound.”

Still, the euro zone is far from calmed. Even if Spanish troubles can be avoided, Europe must contend with three ailing countries together needing hundreds of billions in aid to stay alive, with no immediate prospects of being weaned from the drip. More fundamentally, the economic disparities that led weak nations like Portugal to amass piles of debt owed to foreigners haven’t been resolved.

And European banks, many exposed to wobbly sovereigns, still rattle nerves.

In Spain, for instance, central bank officials are leaning on the country’s larger institutions to buy up a small, weak savings bank to avoid an embarrassing nationalization. And Ireland’s financial regulator said Wednesday his country’s deeply troubled banks attracted so little market confidence that they wouldn’t be able to borrow on markets for “a couple years’ time.”

Portugal had little choice but to seek help. Its cash reserves, which stood at €2 billion at the beginning of the year, are perilously low. On April 15, it must repay €4.2 billion to investors who bought a long-term bond. Read more in The Wall Street Journal.

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Written by Theophyle

April 7, 2011 at 8:24 am

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