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Emmet Oliver: Brave Portugal bows to inevitable, but it could be good news for us

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Portuguese caretaker Prime Minister Jose Socrates making the statement yesterday

Portuguese caretaker Prime Minister Jose Socrates making the statement yesterday

Portuguese caretaker Prime Minister Jose Socrates making the statement yesterday

Portugal bowed to the inevitable last night by admitting for the first time it needed a rescue package from the EU. Like Ireland in November, Portugal tried to convince the markets it could limp along on its own, but in recent days even its own banks were admitting publicly the game was up.

The markets have lost faith in Portugal for a multitude of reasons. One is the country's debt levels, which will soon amount to 100pc of everything the country produces.

Another reason Portugal is viewed negatively by international lenders is the low growth prospects of the country. With exports mainly of food, textiles and wood, Portugal's economy is not regarded as sophisticated enough and when eastern European states entered the EU, Portugal's historical advantage in wage rates was also wiped out.

Portugal talked tough for several weeks about avoiding the humiliation of a bailout, but the cold financial reality facing the country was inescapable.

Portugal needed to come up with €5bn by April to repay existing bonds and if that wasn't a tough enough challenge, the debt-ravaged country was also facing demands from lenders for €7bn by mid-June. These two deadlines eventually became impossible to meet.

Now it joins Ireland and Greece in getting a bailout loan and whatever the terms and conditions, the country will have to impose further rounds of austerity on its population.

While Greece, Ireland and Portugal had different reasons for getting into trouble, the core problem remains the same -- private sector banks, pension funds and insurance companies don't want to lend to any of these countries at rates that are sustainable.

As a result the EU has had to step in, first on an ad-hoc basis, but more recently through an official rescue mechanism known as European Financial Stability Facility.

This fund will now most likely provide loans to Portugal, although an involvement by the Washington-based IMF cannot be ruled out.

From an Irish perspective the rescuing of Portugal is, on balance, a positive development.

Firstly there are now three eurozone states receiving EU assistance and the three countries could now form a negotiating bloc when it comes to talks with Germany about the kind of assistance they will require in the years ahead.

The question of the interest rate on the loans will loom larger than ever. If Portugal, population 10.7 million, decides to force the issue of lowering the interest rate on EU loans, Ireland could also stand to benefit.

Already Greece has wrung concessions from key EU players like Germany and France over its bailout, getting the Europeans to lengthen the maturities on its loans and reduce the interest rate by one percentage point. With Portugal now on life support, the quality and fairness of that life support will now move centre stage at key European meetings, starting this week in Budapest.

However, there is another side. With three countries now opting out of the bond market for the foreseeable future, the total cost of rescuing these profligate states is rising fast for Germany (and France) and that is likely to make voters there nervous and that will transmit to their politicians, notably German Chancellor Angela Merkel.

Her traditional argument that countries which get into trouble must face at least some form of punishment is likely to be strengthened by events in Portugal.

The other impact of the Portuguese bailout is that everyone on the financial markets will now look to Spain, a country described last night by economists as "too big to fail", but also "too big to save".

Irish Independent