The political crisis in Portugal has ratcheted up its chance of a financial bail-out, with investors driving the cost of the country’s borrowing to euro-era highs Friday.
The drama playing out in Lisbon rippled through the 17-member eurozone, coming as it did on the eve of this week’s European Union summit in Brussels.
CNN correspondent Jim Boulden was there, and reports the summit was dominated by discussions of the Libya conflict and Germany’s bail-out fund negotiations.
It was also meant to be the meeting which would cauterize the bloc’s fiscal crisis. Instead, there was talk of a $99 billion bail-out package for Portugal.
The European leaders did reach some answers on the bloc’s fiscal crisis: Outlining details of the new eurozone bail out fund, which will have a lending capacity of €500 billion and be in place when the temporary fund expires in 2013.
It follows the bloc’s scramble to deal with the Greece fiscal crisis and subsequent Ireland bail-out.
But it’s done little to calm investors in Portugal, who Friday pushed the cost of the country’s borrowing – as calculated by the costs of its ten-year benchmark sovereign bond – to near 8%. Rising costs make it increasingly untenable for countries to borrow in the capital markets, pushing them toward bailouts.
The costs have risen steadily since Portugal prime minister Jose Socrates’ dramatic resignation Wednesday, which put the nation's fragile economy squarely in the spotlight. Ratings downgrades from Standard & Poor’s and Fitch Ratings this week didn’t help.
Comparatively, Greece and Ireland’s bond yields of similar maturities both cracked 9% before they turned to their eurozone peers for support, according to data from financial services firm Markit.
While the situations in Greece and Ireland were more urgent – Greece was facing significant bond repayments and Ireland’s banking sector was a black hole for cash – those levels of borrowing are painfully expensive for a country trying to balance its books.
While Portugal could arguably fund itself for a limited time at those levels, it would be a problem in the long term. And cheaper money appears to be available.
Eurozone watchers will be seeing the pattern. Denials that a bail-out is on the agenda mean little. Both Greece and Ireland protested loudly before swallowing fiscal medicine.
As Portugal marches toward sovereign bond repayments of around $13 billion by June, it remains to be seen if the country can do it alone, and what it means for the bloc if it can’t.
As international attention focuses on Libya, there is criticism that another African country, which is also sliding into civil war, has been abandoned to its fate.
The intractable violence in the Ivory Coast continues unabated.
West African leaders say that the situation is a "regional humanitarian emergency."
The U.N. peacekeeping mission warns that forces loyal to former President Laurent Gbgabo are using heavy weapons to target civilians.
Alassane Ouattara, the man recognized by African leaders as the winner of last year’s presidential election, blames the U.N. for not doing enough to protect civilians. It is estimated that hundreds of ordinary Ivorians have been killed since November’s disputed election, including defenseless women protestors mowed down by government forces and then aired on YouTube.
Peer across the Atlantic and one would one get the sense that the intensified campaign to stabilize Libya will be done and dusted by early spring.
At the start of the week, investors pushed the Dow Industrials back above the 12,000 mark with a surge of 1.5%. At last count, the index is up better than 5% for the year, the broader S&P 500 nearly 4%. Part of the late March market madness was based on expectations of an early resolution in the Middle East. Once the missile attacks got underway, the general feeling was that decisive action was taken by the West and that would begin to put the worst behind us.
It is not with some irony then, that the Cairo stock exchange opened for the first time since January 27 and plunged nearly 9% on the day, making it the worst performing equity market in 2011. They say equity markets are good lead indicators for the state of play in their respective economies. Which is more accurate today: the New York Stock Exchange or the Cairo Stock Exchange?
Investors must feel very confident that the U.S. economy can continue to expand by around 4%, without the help of government stimulus. There is also an assumption that energy prices have peaked after the unrest that started in Tunisia but at this juncture knows no limits with Syria, Yemen and Bahrain - all part of today’s "great unknown."
The International Monetary Fund was predicting growth of 4% for the Middle East and North Africa before the year got underway. It is difficult to see how the region can obtain half of that output, with tourism receipts already under pressure and a climate that will only scare off foreign investors.
In the past ten years, the MENA region pulled in over a half trillion dollars of investment –- the bulk of that $450 billion came in the last five years alone according to UNCTAD. Prior to the new millennium, the region garnered less than 1% of global FDI; that figure peaked in 2009 at 7.7%.
The creator of the BRIC acronym Jim O’Neill of Goldman Sachs recently stated that the Arab world could ride the revolution into the club of fast growing emerging markets. Rapid birth rates and high productivity are essential tools for growth. The region’s geographic advantage between Europe and East Asia could also benefit more than just the fast growing airlines, which call Dubai, Abu Dhabi and Doha their home.
O’Neill had been so bullish on the region, that he included both Egypt and Iran into his group of the "Next 11" - the list of nations that hold the greatest promise of joining the bigger global players. But he rightly adds, this climb up to the next level will depend on how the leaders of today respond to the challenges from its youth.
This is not only a Western-held view. Saudi Arabia’s former Director General of Intelligence, Prince Turki bin Faisal Al Saud notes, “We have to formulate new policies that could be up to the expectations of the people of the Gulf, very effective and coping up with the recent developments.”
Prince Turki drew parallels of today’s regional uprisings to the fall of communism in Eastern Europe. It was not widely predicted; it provided historic change and eventually paid a huge dividend in terms of unleashing economic power.
That could be the medium term result of today’s fight for more accountability by the region’s youth, but near term it certainly will not deliver the quick resolution investors on Wall Street have been betting on.
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