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Portugal in “perfect storm” that threatens to lead eurozone into new crisis, warns FT

International business and economics journal the Financial Times has written a damning article on the performance of Portugal’s Socialist government, stressing that it “is more inclined to crowd-pleasing anti-austerity measures than deep reform”, and that this is a recipe for looming disaster.

The question, warns Europe editor Tony Barber, is “whether Portugal’s troubles will make a second financial rescue unavoidable” – and ‘therein lies the rub’.

Portugal’s debt has already been described as “unsustainable” therefore any new rescue programme would have to bear this in mind.

The ‘haircut scenario’ (debt relief) is a “question of utmost delicacy”, explains Barber.

Sixty per cent of Portugal’s debt is held by a combination of the the eurozone’s central bank network and financial and non-financial investors in Portugal, while “investors outside Portugal own the remaining 40% and would, understandably, be apprehensive about any second bailout that foresaw an extensive write-off of Portuguese debt”.

Added to this is the fact that with the IMF is wary of any new kind of troika-led programme for a weak eurozone state.

It has been “burnt by its experiences with Greece’s three bailouts”, and if Portugal were to need help “would first demand a hard-headed analysis of whether the nation had any chance of repaying its debt”.

Another key problem with any kind of bailout scenario is the fact that without the IMF on board, “a German-led eurozone rescue” would very possibly go down like a lead balloon with German voters 12 months before the country holds parliamentary elections.

Thus, the picture is grim – possibly even more so for Europe, than Portugal.

Barber talks about the ‘perfect storm’ of “meagre economic growth, falling investment, low competitiveness, persistent fiscal deficits and an undercapitalised banking sector that owns too much of the nation’s sky-high public debt”, but equally, European leaders are facing choices akin to a rock and a hard place.

The very whiff of debt relief could spark sovereign debt market contagion which could rapidly spread to other parts of the eurozone, explains the FT article.

For now, eyes are on Canadian ratings agency DBRS. If this decides on a downgrade next month – losing Portugal access to ‘easy’ ECB money (click here) – then the situation could get very bad indeed.

natasha.donn@algarveresident.com