March 25th, 2011
07:13 PM GMT
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.
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