Newest member of the rescue club has boosted us already
Published 09/04/2011 | 05:00
TWO'S company, but three is a crowd. There is no doubt that the arrival of Portugal in the EU/IMF rescue club will change the relationships between the lenders and the recipients. Exactly how, though, is anyone's guess.
It is worth remembering what the problem is. It is not that Portugal wants to borrow an extra €80bn. The money is what Portugal would have borrowed anyway over the next few years to replace existing debt due for repayment and cover its expected budget deficits.
The problem is that the normal lenders to governments -- banks, insurance companies and the like -- are so nervous that they will not lend to Portugal at affordable interest rates. The "bailout" loans are to avoid the crisis that would ensue if the Lisbon government could not repay loans on time, or pay the wages for its government workers.
Greece and Ireland had the same difficulty, but all three suffered this loss of confidence for somewhat different reasons.
In Greece and Portugal, the nervousness is over the size of their budget deficits, existing debt and economic prospects; with the main concern about deficits in Greece and economic prospects in Portugal.
In Ireland, the cost of the bank rescues was the main thing that frightened lenders. This is followed by the economy, especially in a week when interest rates began to rise. There is probably less worry about the ability of the government to deal with the budget deficit itself, large though it is, than in the other two countries.
It has been a dramatic week. Irish household debt far outstrips that of other euro countries, so a series of increases in ECB rates would be highly damaging to hopes of economic growth fuelled by better consumer spending.
There may not be a series of ECB rises. Perhaps the most significant event of the week was the sharp improvement in the price of Irish government debt.
Irish bonds seem to have benefited from the Portuguese request for assistance. One reason may be that it increases the chance of an early cut in the interest charged on Ireland's bailout loans, which is currently more than 6pc.
There is more "political risk" in the Portuguese situation than the Irish, or even the Greek. The EU/IMF will insist on at least the austerity programme which the Lisbon parliament rejected. The Irish government's difficulties over not being able to "burn the bondholders" fade into insignificance compared with those of a new Portuguese government having to push through a full austerity programme.
As Mr Kenny and Mr Gilmore found out, when you have no money, your choices are limited. It may be mid-summer before a final Portuguese deal is done, but when it comes it is unlikely to carry the three percentage point rate premium which Ireland pays.
That may be the point at which Ireland gets a reduction. That would be a political relief to the government, but it will make no noticeable difference to the squeeze on taxes and spending in the short term.
What would really make a difference in the long term is if the arrival of Portugal in the bailout club persuades the leaders of the eurozone to devise a credible overall strategy instead of lurching from one crisis to another.
They know that a market loss of faith in Spain could spell the beginning of the end of the whole single currency project and spark a second great global financial crash. So far, markets seem happy enough about Spain, even though some analysts put its banking losses at €80bn and there is no doubt, from the trade and payments deficits, about its lack of competitiveness.
Any investor selling Spanish bonds now would make only a small loss. They are bound to wonder if taking such a loss might be better than risking a big one if Spanish bond prices start to tumble.
If they did take fright, it might be too late for Europe to produce a credible rescue and restructuring strategy.