Then come the other dominoes: Spain, Italy, UK and France.
(Ireland and Greece have been totally destroyed.)
Spain is already ‘too big to bail out’:
Nouriel Roubini, the US economist, said Portugal should consider asking for a bailout before its financial plight worsens as the euro fell after the €85bn Ireland bailout failed to ease eurozone debt fears.
However, he said neighboring Spain, Europe’s fourth-largest economy, is “too big to bail out.”
Unless the ECB prints euros ‘until Europe runs out of trees’.
Mar. 25 (Bloomberg) A bailout for Portugal may total as much as 70 billion euros ($99 billion), two European officials with direct knowledge of the matter said, as credit-rating cuts threatened to deepen Portugal’s debt woes.
Preliminary calculations put the cost of a lifeline from 50 billion to 70 billion euros, said the officials, who declined to be named because the issue is confidential. Portugal continued to rule out a rescue after the parliament’s rejection of budget cuts led Prime Minister Jose Socrates to offer to quit.
Downgrades by Fitch Ratings and Standard & Poor’s dealt a further blow, as European Union leaders called on Socrates and the opposition parties to unite behind belt-tightening measures that might spare Portugal from becoming the third euro country to tap emergency aid.
Portugal has proposed “a very ambitious, a very demanding reform program for the years 2011, 2012 and 2013,” German Chancellor Angela Merkel told reporters yesterday before a summit in Brussels. “It will depend on all with responsibility in Portugal today or possibly tomorrow committing to the goal of this program so that the markets can gain confidence.”
The leaders’ meeting, which ends later today, will also consider lower interest rates for Ireland’s emergency loans and German efforts to renegotiate the financing of a permanent rescue fund to be set up in 2013.
As the summit began, Fitch announced the cut in Portugal’s long-term foreign and local currency issuer default ratings to A- from A+ and in its short-term issuer default ratings to F2 from F1. The ratings were placed on rating watch negative.
“The downgrade reflects increased risks to policy implementation and fiscal financing in light of the Portuguese parliament’s failure to pass fiscal consolidation measures and the resignation of the prime minister,” Douglas Renwick, director in Fitch’s Sovereign group, said in a statement.
Hours later, Standard & Poor’s lowered Portugal’s sovereign credit rating to BBB from A-, citing “increased political uncertainty” that could “hurt market confidence and heighten Portugal’s refinancing risk.”
The yield on Portugal’s two-year note jumped 10 basis points to 6.71 percent at 5 p.m. in London yesterday, and reached 6.89 percent, the highest level since the euro’s inception in 1999. The 10-year yield advanced three basis points to 7.66 percent, leaving the difference in yield investors demand to hold the securities instead of German bunds at 442 basis points.
“It’s pretty inevitable” that Portugal will need a rescue, said Jacques Cailloux, a London-based economist at Royal Bank of Scotland Group Plc. “The market will deteriorate in the absence of other measures going through. There is obviously the risk of further downgrades, which will become anticipated by the markets and be a self-fulfilling prophecy.”
Portugal navigates the next stage of the crisis with the government’s powers in doubt. President Anibal Cavaco Silva said he will meet with the main parties today and the government will retain its full authority until he accepts Socrates’s resignation.
The political deadlock comes as Portugal braces for its first bond maturities of the year. It faces redemptions worth about 9 billion euros in total on April 15 and June 15, which could coincide with early elections. Portugal intends to sell as much as 20 billion euros of bonds this year to finance its budget and cover maturing debt.
Portugal’s situation is “precarious,” Belgian Prime Minister Yves Leterme said.
A backlash in Europe’s better-off countries against the 177.5 billion euros lent last year to Greece and Ireland will color the handling of Portugal. German political jitters over propping up debt-swamped states dominated the crisis response last year, with Merkel delaying aid for Greece and calling for bondholder losses that hastened Ireland’s plunge into the fiscal abyss.
Germans vote in the state of Baden-Wuerttemberg on March 27 in an election threatening to end almost six decades of control there by Merkel’s party. Political sensitivity is high in Finland, where polls show a surge in support for an anti-euro party in the run-up to April 17 elections.
Germany and Finland squared off over the planned permanent rescue fund yesterday, with Merkel questioning a March 21 accord to endow the fund with 80 billion euros in cash and 620 billion euros in callable capital. Germany would furnish 27.1 percent of the total.
Merkel wants to stagger Germany’s cash payments over five years instead of four and cut its upfront payment in 2013 to 4.3 billion euros from 10.9 billion euros, potentially limiting the fund’s firepower.
No “easy answers” are likely for the German demands, Finnish Prime Minister Mari Kiviniemi said in a Bloomberg Television interview. “We understand the German position, but what is important is that, when it comes to decisions made on Monday, that we are not increasing any country’s responsibilities.”
Merkel’s bid to renegotiate the three-day-old financing accord punctured the EU’s plans to proclaim a “comprehensive” solution to the debt crisis, including tougher sanctions on excessive budget deficits and national pledges to increase competitiveness.
Details remain unresolved over how the bloc will fulfill a promise to get full 440 billion-euro lending capacity out of the temporary rescue fund, set up last year at the height of the Greek phase of the crisis.
The fund, known as the European Financial Stability Facility, is limited by collateral rules to lending only 250 billion euros.
About 19,000 demonstrators protested governments’ austerity measures before the summit started in Brussels, Nicolas Dassonville, a spokesman for Brussels City Mayor Freddy Thielemans, said by telephone. Police used water cannons after 30 demonstrators tried to break through a police cordon, injuring 12 officers, he said.
By James G. Neuger and Joao Lima – Mar 25, 2011 1:39 AM GMT+0100