THE FINANCIAL TIMES -LEX /PORTUGAL

Portugal


Published: January 10 2011 10:06 | Last updated: January 10 2011 20:05


Peer pressure comes in many shades. European officials deny that they are urging Portugal to seek a bail-out. This is as effective in achieving the desired outcome as barking orders down the phone to Lisbon. A bail-out bell tolls for Portugal in any case. That would be a rational step. Portugal now has to pay an interest rate of around 7 per cent on its bonds – too expensive for Portuguese taxpayers to bear, especially as relatively cheaper bail-out funding is available, from the European Union and the International Monetary Fund, in the manner of Greece and Ireland. 


As has occurred repeatedly throughout this eurozone crisis, however, the relatively minor matter of addressing Portugal’s entirely manageable fiscal crisis obscures the eurozone’s wider challenge. Spain looks increasingly shaky, despite the best attempts of the government to establish a structural reform agenda to get ahead of market sentiment. Italy is as vulnerable as it has ever been. Belgium – virtually a microcosm of the eurozone, with its north-south divide and perpetual political gridlock – is also caught in investors’ cross hairs.


The current European funding mechanisms would be barely sufficient to help Spain should it seek external help to finance its €53bn funding needs for 2011. This poses a huge challenge for eurozone policymakers, which must be addressed urgently. Two things need to happen. The lending capacity of the European financial stability facility, the vehicle used in the Greek and Irish bail-outs, needs to be expanded beyond its current, roughly €350bn scale. The interest rate on these European loans also needs to be reduced if these countries are to achieve the holy grail of debt sustainability.


The eurozone crisis is moving inexorably from the periphery to the core. What began as a fiscal and banking crisis on the fringes has expanded into a crisis of credibility at the heart of European policymaking. After Portugal’s inevitable rescue, the eurozone will have run out of easy options.


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