Portugal is Trying to Walk with its Bailout Crutches

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Coelho under pressure

Prime Minister of Portugal
Prime Minister of Portugal | Source

Portuguese bailout

Italy is much talked about, but Portugal is a time bomb

While discussing Euro crisis, everybody is talking about Italy more and more now days. This is because the debt burden of Italy is much more than the combined debt burden of Spain, Portugal, Greece and Ireland. Naturally banks, media, financial institutions, investors, politicians and general public are focussed on Italy. But Portugal is a time bomb. Any time it can explode. In fact it has the potency to break up the European Union itself. Portugal’s credit rating has been downgraded to ‘junk’ in July this year. This has shocked financial markets all over the world.

France’s credit rating may be downgraded

One has to pity the European Union really. If a scorpion is biting a part of one’s body, it is possible to tackle it by throwing it out. But if more and more scorpions join and each in turn bite in different parts of the body, then it is a difficult situation. The European Union struggled to bail out Greece. Then Portugal joined the list, then Spain, then Ireland and then Italy. Who else is in the waiting list is not clear. The so called strong nations among European Union namely Germany, Britain and France are becoming weaker and weaker because of these bailouts. It will not be a surprise if tomorrow Britain, France and Germany come out with begging bowl for salvaging themselves. Already there is a talk of downgrading France’s rating.

Portugal will need a second round of bailout

Already Portugal was bailed out by the European Union before. Now Moody’s is telling that Portugal needs a second round of bailout before it could return to the capital markets again with its bonds. Greece also faced a similar situation. It was bailed out months back and now European Union has bailed it out again with a package of € 120 billion. Greece will need another bailout amounting to € 200 billion some time within one year. In the meanwhile, European Union will have to ready itself with more funds, probably a minimum of € 100 billion to bailout Portugal. But Italy will need much higher amount of € 500 billion for its first bailout package. The second bailout may require more amounts. Britain, Germany and France should arrange funds now itself for a timely bailout. Nobody knows how much Spain and Ireland will need in their first bailout package.

Private sector will be forced to involve in bailouts?

Ireland’s first bailout plan requires € 85 billion. In the second bailout package, Ireland will need not less than € 120 billion. There is a growing clamour among the public that the rich bankers and insurance companies should be involved in bailout packages of nations facing debt crisis. But Moody’s is opposing this idea as it feels that forcing private sector to involve in debt crisis will aggravate the economic crisis. Portugal had put up a large fiscal deficit of 9.1% of its GDP last year. The bailout plan for Portugal sets the target of reduction of its fiscal deficit to 5.9% of GDP this year, 4.5% of GDP in 2012 and 3% of GDP in 2013. For this, strict austerity programmes have been prescribed for the Portuguese government to follow. Portugal’s public debt was 68% of its GDP in 2007. It mushroomed to 93% of GDP in 2010. European Union has forecast that this percentage will cross 100% of GDP this year and further soar to 107.14% of GDP in 2012.

Passos Coelho has no alternative but to resign

Portuguese Prime Minister Passos Coelho’s new government faces the prospects of tackling the increased anger of the Portuguese people because of the imposed austerity moves. The government has to agree to these moves. It has no choice. Perhaps Passos Coelho may resign in another few months’ time as his Greek counterpart Papandrou did recently. Because of the bailout package and the austerity programmes, Portuguese economy will contract by 2% this year and this contraction will continue till 2013. The European countries look forward to IMF for help to bailout the Portuguese economy, but IMF itself in a stage looking for somebody to bail it out. See my article about IMF in the links section below. USA was able to help the European countries through its Marshall Plan at the end of the Second World War when the European countries were ravaged by war. But now USA itself is looking for someone to bail it out of the present impasse and is in no position to turn to Europe to offer its help.

European debtor nations can beg before China

As the bailout crutches are handed over to the Portuguese people and the government, the world refuses to believe that it will prove to be a panacea. The bailout package involved cut of pensions above € 1500 per month, cut in health services and addition of VAT on products. As Portugal limps on with its bailout crutches, the European Union turns its attention towards other countries. After all, there are more scorpions biting in various parts of the body and the person who is bitten cannot be preoccupied with one scorpion alone. As a last hope, these begging European nations can fall at the feet of China, the financial superpower today and request for some help. China will not sponsor a bailout, but the debtor nations should consider themselves lucky if China doles out some alms, taking pity of them.

Portuguese Bailout

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