January 12th, 2011
02:23 PM GMT
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Are you confused by the market talk about Portugal needing a bailout? You might be even more so now that the country has successfully sold bonds at a lower yield than expected (20 years at 6.7 percent).

In the current market, selling bonds at a yield - or interest rate - below seven percent is seen as a small victory, though not sustainable in the long run.

The Portuguese government continues to say it can pay its bills, through bond sales and through tax rises and budget cuts, thank you very much. Of course that is what Greece and then Ireland said. Now, neither country needs the bond markets as each has been given massive loans (bailouts) by Europe and the IMF.

The worry about Portugal is all about perception and contagion.

Here is one scenario: Portugal says it does not need a bailout and refuses to ask for one. So ratings agencies downgrade the country's bonds (sovereign debt) which means Portugal's government costs rise. That means it's harder to cut its budget deficit to an "appropriate level."

It also means Portuguese (and Spanish) banks hold paper that is more risky, so rating agencies downgrade the Portuguese banks, raising their costs. Now, the market starts to sell the bonds in fear of a default (then too much paper on the market) while continuing to demand higher and higher interest rates to buy new paper from the government and from the banks.

With Ireland having to pay 5.8 percent for its bailout loans, at some point Portugal will be paying too much to sell its debt and a bailout becomes a cheaper option. But it comes with heavy (IMF) fiscal strings attached.

Portugal would have to decide which is worse. And it will have to deflect talk that other countries want it to accept a bailout to keep the debt disease from spreading into big economies like Spain and Italy.

Not that the European bailout fund has enough money to finance a Spanish bailout for more than a year and who knows what that would mean for the value or very future of the euro.

What should Portugal do?

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Filed under: Business


soundoff (18 Responses)
  1. Mattus

    I think you have answered your own question, stricter rules on how rating agencies operate.

    January 12, 2011 at 3:02 pm |
  2. E. Almeida

    Portugal has no real say on what it is going to do. The Portuguese government will go to all extents in trying to keep the IMF out – because once they enter it is likely the government will fall. Unfortunately, the current government is probably one of the least to blame, as the debt problem started in the early 90s. In my opinion, the IMF should enter ASAP, clean the mess (for which the government clearly does not have the balls to do) and set things right for the long term. About the lower yield, there is talk about Chinese interest in the bond...

    January 12, 2011 at 6:10 pm |
  3. Manuel Vilhena

    Jim, your article as usual is very interesting and reflects what journalist all over the world think about a bailout to Portugal. The issue is in my opinion is larger than that. Our Prime Minister Jose Socrates is tremendously stubborn and even if the pressure is tremendous he won't change his mind on our ability to reduce the deficit down to an acceptable level.

    My opinion is that depends on the first quarter results and we and the markets need to wait until next April and then see the reaction of the markets to our results.

    Manuel Vilhena (Portuguese)

    January 12, 2011 at 6:42 pm |
  4. diogo

    Is this the best picture CNN could get from the portuguese prime minister?
    Not nice at all.

    January 12, 2011 at 7:12 pm |
  5. Christopher Higgs

    Portugal needs to create more productivity and consumer confidence which is impossible with the current tax rates in effect! The cost of living in Portugal almost equals that of the UK when taking into account the various taxations throughout the economy! The country has lost consumer confidence, productivity and has an increasig trade deficit. If this continues Portugal will be a permanently vulnerable nation with little or no bargaining power. The EU must close down on Portugal and must oblige the government to take other measures other than sinply increasing taxes and decreasing benefits. Thus an EU loan is necessary however other measures need to be enforced from external sources.

    January 12, 2011 at 7:47 pm |
  6. Eduardo Domingues de Jesus

    Eike Batista is a Brazilian person that surprised many, maybe in an admirable or even in an exemplar way. Maybe those Brazilians of some Portuguese origins may understand that the entrepreneurship spirit is not just an American dream pill-like, it has a value. Nearly every Portuguese that once immigrated to Brazil had built a successful business, many were illiterate, same, and often, to really many other immigrants from other countries in Brazil. There are various reasons why Portugal (and Greece, Ireland) are on the situation where they are, but essentially Europe risk to sleep over its own age, with its own conservatisms that essentially leaves no space for generating business, and lots of cash is used in offices. That is also combined with bad habits of population rising social benefits without a society capable to secure positive ambitions, that generate further tax revenues. As a positivist person, I hope that European Union would stop the demagogy to fake supporting entrepreneurs and at least allow them more space to work on themselves. Imagine if the only the culture in Europe could have (finally) the chance, for instance, to really become a business. The point: Europe lacks of ambition, and the less predatory the better, and it shows no signs of waking up while Brazil, Russia, India and China "naively" started making money.

    January 12, 2011 at 8:58 pm |
  7. Lusitano

    Portugal doesn´t need bailouts from the IMF and/or EU – we´re fine on our own. This so-called "crisis" is nothing but perception... a fine tactics from the USA. Portugal is a leading and thriving nation, continuing its world pioneering skills for centuries now: world´s first on alternative energies; world´s first on electronic tolls; world´s first on intelligent ATM networks; domotics; broadband; hotels; golf courses; beaches; best sun; etc. Proudly Portuguese! "Contra os Canhoes, Marchar, Marchar"!!! ["Against the Cannons, March!, March!"]

    January 12, 2011 at 9:23 pm |
  8. Daniel

    Why this photo? It`s ridiculous..
    About Portugal all I can say is that Portugal will sooner or later need a bailout like Greece and Ireland and as a Portuguese all I can say is the sooner the better!

    January 12, 2011 at 11:47 pm |
  9. Mukwa Malanje

    Can Angola be of any help to Portugal? Or put it other way: Can the stolen wealth by the President Eduardo dos Santos of Angola and his/her Portuguese friends help Portugal in its darkest times?

    January 13, 2011 at 12:11 am |
  10. luis catita

    As a roman general said about Lusitania ( roman name for Poortugal) – " They can't take care of themselves but they don't allow others to take care of them"

    January 13, 2011 at 12:45 am |
  11. sm

    so how much is goldman sachs going to make off of portugal ?

    January 13, 2011 at 1:14 am |
  12. Vasco Goncalves

    It is sad for me seeing that Portugal and other EU countries are suffering, and you, all foreign mass media, feel so happy with our sadness.
    Thank you Mr. Socrates, you also gave a good lesson to speculators, we know who they are, but we will win this Battle.
    The year 2011 Will be harder, it is time to see who are our real friends.

    Let´s join the family, Brazil, Angola, Mozambique, E.Timor, Guinea, C. Verde... Those are countries are our family... Let´s work together.

    January 13, 2011 at 2:16 am |
  13. Pete

    Portugal should legalize and tax marijuana. Problem solved.

    January 13, 2011 at 2:18 am |
  14. paulo

    well, i like the comments by C.higgs and eduardo, you right about that,myself i open a few buiness in previous time in portugal,and was the biggest mistake ever,prices are high,taxes are high,and salaries are the lowest, this crises have noting to do with USA,look at iceland when the prime minister warn the banks not to raise the %. oil was up in price,dollar was down,,all equals to same,this is called greed,and should be controled by goverment,socrates so far he shows that is a prime minister that cares,nothing like the portuguese president that sounds like bush.funny that all portugal population calls the goverment a bunch of pirates,but was the comercial bussiness people that destroy the portuguese economy when euro was entreduce in portugal by raising prices by 50%.
    about the lusitano comment,go and emigrate,learn history and smell the coffee and grow up. feed up with this comments about portugal,when in portugal they all complain about it.

    January 13, 2011 at 2:38 am |
  15. LM

    Let us be honest: Portuguese have their fair share of hard working, very competent people. Unfortunately they also have their fair share of slouching, incompetent people. And their fair share of not too transparent, certainly questionable, possibly corrupt, politicians.

    The education system is a shambles which means at least one generation has possibly been ruined. Teachers are pressured by some school boards to allow students to pass to improve the school's ratings. The government has allowed this to happen and even has (or at least had, they keep changing) a policy of not allowing students to fail in the first grades.

    Some people spend as if there was no tomorrow, borrowing money for clothes, holidays and plasma TVs (there are not many other ways to explain the millions more than last year that people spent this Christmas and New Year). Others, try to save but can't save much because this government taxed everything in sight, cut health and education benefits and suppressed almost every deduction, instead of saving on idiotic and/or postponable expenses.

    Manuel, you're right, the prime-minister is increadibly stubborn and will refuse to change his tune until he gets laughed off the stage. And then he'll blame the USA, the rating agencies, the opposition, the crisis and the weather! And possibly the CNN journalist who chose the photo! ;-)

    Higgs, bull's eye!

    And I also hope the IMF or the EU moves in fast enough to keep Portugal afloat.

    January 13, 2011 at 4:04 am |
  16. Digby Green

    I hope Portugal can do well on her own.
    But as a New Zealander all I know that Portugal does is make wine and sell cork.
    How does Portugal pay its way in the world to buy all those Plasma tv's ?

    January 13, 2011 at 6:48 am |
  17. Andreas, Stockholm

    Aside from the already mentioned fiscally sloppy behavior by the Portuguese governments this situation is more complex than it may a t first look. The EURO has as a currency serious weaknesses due to it's lack of fiscal policy consolidation amongst its member states and this is now being dealt with. Until the EURO gains these fiscal mechanisms it is vulnerable to outside forces wishing to tear it apart and/or denting its emergence as a possible countercurrency to the US dollar.

    China understands what is going on and is using the situation to gain world standing now after having its first WB RMB bond and started allowing limited RMB FX trading. Japan also sees the events clearly and is acting to stay ahead of things by not being overrun by its neighbor adversary. Both countries want a strong EURO as counterballance to a dominant USD. With a future currency-basket for resource pricing the world can move away from rapid speculator amplified price swings and is preferred by most except the US/UK who today benefit most off of this.

    Portugal is the victim of the day in this large battle of the currencies and only the latest arena clash between the two fiscal philosophies du jour – austerity vs QE. While the US continues to borrow as if there is no tomorrow due to the fact that they still can having the only defacto resource currency this may come to an end sooner than we all hope which is precisely why the Asian giants are acting now.

    January 13, 2011 at 8:06 am |
  18. Alex Matias

    I am very surprized to read these so called "positive" comments posted here, by some posters from Portugal..

    I would say that most posters are playing on the same team as this dis-gracious government, plagued by lies, corruption (of the PM himself) and foul play of one of the worse prime ministers we have had (excluding the pathetic Guterres)..it's a shame and a disgrace..this guy is accused of corruption almost each day, and nothing happens to him!

    I hope he goes away fast and that after he gets prosecution for all his wrong doings..

    With this government, and the way they operate, Portugal is sinking heavily!!!

    But again...since CNN is a liberal opinion (I'd say almost left wing), (note I did not say Socialistic) agency...I assume the posters that flourish here, to be of that tendency as well, and thus painting this disgrace of a government with lighter colors..

    This is a very hard time for Portugal, and things are really bad..no matter what other have said here...

    The photo is perfect..the guy is actually uglier than that...

    This PM makes me feel ashamed to be Portuguese!

    Alex Matias
    portugal

    January 14, 2011 at 4:07 pm |

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