The European Union’s debt-crisis-fix-it summit starts today in Brussels and already hopes are fading for a breakthrough. For that, the summiteers can thank Portugal’s deft ability to pile a political crisis on top of a financial crisis, plus waning political support in Finland and Germany to fling taxpayer money at countries that should have known that spending more than you earn has predictable and dire consequences.
The two-day summit, which is to end Friday night, was supposed to lend final approval to crisis-fighting measures, such as the launch in 2013 of a permanent bailout fund, known as the European Stability Mechanism (ESM), and boosting the size of the existing fund, called the European Financial Stability Facility (EFSF).
Into this alphabet soup wades hell-bound Portugal. On Wednesday night, Portuguese prime minister Jose Socrates lost a crucial parliamentary vote on the adoption of his government’s latest austerity measures. He tendered his resignation, though he is expected to attend the EU summit as the leader of a lame duck caretaker government.
Deciding how to save Portugal will no doubt dominate the summit, and Portugal certainly needs saving. Yields on Portuguese bonds have been rising all week, to levels that are patently unsustainable. They rose again Thursday morning. The interest rate on Portugal’s 10-year debt rose to a euro zone record of 7.71 per cent.
Watch the level. Last year, Greece and Ireland reversed their no-bailout stance shortly after their sovereign yield rose above 7 per cent. Debt traders are wondering if Portugal’s crushing yields will quickly result in the fatal blow -- the raising of margin requirements. In November, Ireland capitulated when LCH.Clearnet, the London-based clearing group, doubled the margin requirement to 30 per cent on the trading of Irish government bonds.
On Thursday, analysts and economists were busy estimating the cost of a Portuguese bailout, not a easy task given the uncertainties surrounding the cost of propping up the country's banks. Royal Bank of Scotland (RBS) tossed out a bailout figure of €80-billion, equivalent to a massive 47 per cent of Portugal’s gross domestic product.
For the summiteers, fixing Portugal now poses a political as well as financial hurdle. To wit: Can the EU negotiate a rescue package for Portugal when Portugal, in effect, lacks a government? “In a situation of a political void, cutting a deal with the [International Monetary Fund] and the EU to trigger financial support would be particularly cumbersome,” said Giles Moec, economist in London with Deutsche Bank.
Indeed, big euro zone decisions, like sovereign rescues, have to be decided by all members of the euro zone. Portugal will probably have new elections in May. But for a country that is effectively shut out of the debt markets, two months is a long time, all the more so since the country faces bond redemptions worth €9-billion by June. “This crisis occurs in the worst possible moment for Portugal,” Mr. Socrates said Wednesday night, with no exaggeration.
Making the political mess even messier is Finland, which has dissolved its parliament ahead of the April 17 election. The Finnish government cannot make any big decisions, such as bailout out a country or locking into a funding mechanism for the new ESM, until a fresh government is put in place. On top of that, Finns, like Germans, are becoming more skepitical about the great single-currency experiment. German chancellor Angela Merkel faces regional elections this weekend as support for her conservatives is on the wane. Germans increasingly fear that they the EU is evolving into a “transfer union,” with the rich north (read Germany) funneling loot to keep the euro zone’s deadbeats alive.
Mr. Moec, of Deutsche Bank, thinks the European Central Bank may have to come to Portugal’s rescue in the absence of a quick EU decision to launch a bailout. He said “we see massive [ECB] intervention in the secondary market just ahead and just after [the Portuguese] bond auctions as the only possibility to offer short term relief to Portugal before a formal deal is cut.”
In other words, Portugal is bound to be euro zone rescue victim No. 3. The big, ugly question is: Who’s next?
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