Commuters wait at a bus stop in the early morning light in Dublin on Monday, Nov. 22, 2010. Ireland won't be an attractive place to invest and it won't be a good place to find a job in the coming few years, prompting the emigration of the clever and talented people that drew so much of the foreign investment into the country over the past 15 years.PETER MUHLY
Now that Ireland has become the second of the fiscally battered euro zone countries to reluctantly accept a rescue package, the question is not whether there will be more bailouts, but who comes next.
Portugal stands at the top of most analysts' lists, even though its economic fortunes have improved a bit recently and its banking sector is in better shape. Its budget deficit and public debt levels also stand well below those of Ireland or Greece, the first of the debt-ridden countries on the periphery of the euro zone forced to accept financial aid from the European Union and International Monetary Fund.
And fears are growing that much larger Spain could eventually succumb as well, if bond investors demand increasingly higher risk premiums to finance its large budget shortfall and keep its shaky banking system afloat.
If the main purpose of the Irish and Greek bailouts was to assuage worried markets and stabilize the euro, it has not worked. The euro fell on Monday against most other currencies, stocks across Europe retreated, and bond yield spreads and default costs soon widened again, amid concerns that more expensive bailouts will soon prove necessary to safeguard European banks.
Bond investors rushed to the relative safety of U.S. Treasuries after Moody's Investors Service warned that Ireland faces a steep cut to its credit rating over the aid package. The credit rating agency is concerned about increased debt on the government balance sheet stemming from the forced cleanup of the banking system, which is a condition of the assistance.
The markets not only worry about further bailouts but about the fact that stronger EU members such as Germany and France will likely have to tap the sovereign debt market to pay for them. The much-vaunted European Financial Stability Facility and all of its guarantees remain unfunded.
Another problem for European policy makers is that the Greek fiscal mess is actually worsening, despite the rescue launched last May. Athens has yet to meet the conditions set for the next payment under the plan, which has been delayed until January.
"Had they fixed Greece properly to begin with, bond investors would have concluded that the EU could also fix Ireland," said Carl Weinberg, chief economist with High Frequency Economics in Valhalla, N.Y. "If Portugal comes under suspicion, they'll say: 'Clearly, these guys who couldn't fix Greece or Ireland can't fix Portugal, and so on.' "
And if the cost of bailing out small economies like Ireland run to €90-billion ($125-billion) or more, analysts shudder at the potential price tag of a rescue for mid-sized economies like Spain's.
Analysts are divided on whether Spain will need the help.
Fortunately, policy and macroeconomic developments in Spain since the eruption of the European sovereign bond crisis … have gone in the right direction, differentiating more and more clearly this country from Ireland and Portugal," Gilles Moec, co-head of European economics research with Deutsche Bank, said in a report.
"The fiscal deficit is steadily falling, so is the current account imbalance, while banks are enjoying an easier access to the money market."
But Mr. Weinberg paints a darker picture.
"If anything, Spain is more vulnerable on the numbers than Portugal. Its debt is higher and it has known large problems in its banking system just like Ireland."
As did Irish leaders before him, Portuguese Prime Minister Jose Socrates insists his government does not need the help. "What the country needs is to do what is necessary, to approve the budget, and to continue in its efforts [to reduce the deficit]" he said in a radio interview Monday.
But despite a round of austerity measures in May, "the Portuguese deficit has failed to show a clear-cut improvement in 2010, especially in comparison with other peripheral euro zone countries like Greece or Ireland or even Spain," Citigroup said in a note to clients on Monday. As the government seeks to impose deeper budget cuts, labour unrest is growing. The country faces a 24-hour general strike on Wednesday.