Portugal Goes on the Dole; Spain Resists For Now

Portugal’s Prime Minister Jose Socrates announced today that Portugal has no choice but to seek emergency funding to meet its upcoming debt obligations. The request is expected to total 75 billion euros (US$107.1 billion) and in light of recent events including the resignation of the Prime Minister, the news hardly came as a surprise.

The resignation – which will take effective as soon as a general election can be held – was the final act in this on-going saga. It is now up to Finance Minister Fernando Teixeira dos Santos to negotiate a loan that prevents an outright default, while ensuring repayment conditions are not overly punitive.

When previous Eurozone bailout recipients Greece and Ireland turned to the Eurozone for help, they were forced to accept strict conditions in exchange for their respective deals. Greece pays 3.4 percent interest for the first three years of the agreement, and 4.5 percent after three years. Ireland – which is trying to negotiate for a lower interest on outstanding loans – pays 5.8 percent.

Both countries were also obliged to enact considerable spending cuts in order to reduce deficits to within Eurozone guidelines. For Greece in particular, this has forced the government to reduce and eliminate wide-ranging social spending initiatives and this has resulted to large-scale demonstrations and massive protests.

News of the bailout request is likely to create further tensions within the Eurozone. The idea of propping up spendthrift nations is rather vexing for those that feel they have exercised caution and acted responsibly by keeping debt levels manageable. German Chancellor Angela Merkel in particular has faced resistance and her coalition government has recently suffered high-profile defeats in key regional elections held late last month.

Even though Britain is not a member of the Eurozone – nor does Britain use the euro as its currency – Portugal’s request for aid will also likely rankle British taxpayers. An arrangement concocted late in the final term of the previous government means the country could be forced to contribute upwards of £6 billion (US$9.8 billion) directly to Portugal’s bailout fund.

On a more positive note however, Spain which is also considered a likely candidate for default, received a major vote of confidence from the International Monetary Fund. Dominique Strausse-Kahn, Managing Director of the IMF, told a newspaper earlier this week “I don’t believe the Spanish government needs any type of financial aid”.

“I believe the policies that the Spanish government has implemented, as much on the fiscal side as in the reform of pensions, the labor market or in banking, are the correct policies,” he added.

Despite this high-placed assurance, markets remain unconvinced. Spain’s debt has received credit ratings downgrades in recent weeks and Moody’s has warned that it may reduce its rating further in the coming weeks. This will add to Spain’s cost to borrow money which may well yet propel the country towards insolvency.

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