Greece, Ireland, now Portugal, then… Spain? Now that would be disastrous. Judging from the amount of denial related to the possibility of a Portugal bail-out, a financial rescue package seems to be a matter of when rather than if. Regardless of denials from Lisbon, Paris, and Berlin of any pressure on Portugal, rumor has it that the large European economies are pressuring the Portuguese to take the bail-out sooner rather than later.
By taking the bail-out now it is hoped that the contagion will not spread to Spain, which is an economy of a magnitude far larger than the relatively small Greek, Irish, and Portuguese ones. A bail-out of Spain would stretch the existing bail-out fund, and perhaps make the Germans balk at any further footing of the euro bill.
Meanwhile, the market will keep a keen eye on Portugal’s auctioning off of government debt this Wednesday (January 12), an auction set to the tune of 1.25 billion euro. The question is; What it will take to make the bonds attractive to investors? Not only does Portugal need to worry about financing their debt, they also have to consider if the interest rates will be so high as to render it impossible for the country to sustain the high yield level. For example, Portugal’s 10-year bonds trade for a knee-buckling 7.26 %.
What is to come of the euro? What if a bail-out recipient simply decided that the single currency isn-t worth years of belt tightening? Pessimism among onlookers – who note that Portugal is going through the precisely the same motions as Greece and Ireland – is spreading. In short; if it didn’t work before, why would it work now? After all, nothing has really changed. Europe still suffers from the same cocktail of large debt, low growth, coupled with nasty spend-cutting measures. If Greece is an accurate indication of Europe’s predicament the budget-slashing measures are both necessary and growth retarding. After all, the only long term solution to the problem is economic growth that will enable the indebted countries to pay off what they owe.
I would love to end on a high note so here is a somewhat strained one. European leaders are firmly committed to the euro and their will to save the currency should not be underestimated. On the other hand, Europe seems to have a debt spiral on their hands. Paying off the debt stunts the growth needed to pay off the debt…
