This week Portugal officially became the third euro-zone country to seek a financial bailout from the European Union (EU) and the International Monetary Fund (IMF). Preliminary estimates are that Portugal will need a bailout of around €80 billion ($114 billion), though a final determination of the bailout size has yet to be made. The country was thrown into political crisis last month after Prime Minister Jose Socrates resigned when the nation’s parliament failed to pass an austerity budget. Portugal’s cash reserves are dwindling and the country has nearly $10 billion in debt due before June 15. Portugal was able to issue debt earlier this week, but at a steep interest rate price. Portugal had been depending on its domestic banks to absorb shaky government debt, but Portugal’s banks were hesitant to assume more government debt after the European Central Bank (ECB) indicated that the bonds could no longer be used as collateral for ECB loans. One concern is that now that Portugal has sought financial assistance, attention will shift to Spain, but Portugal’s bailout has seemed inevitable for weeks and yet the situation in Spain seems stable. Even if Portugal is the last euro-zone country to need financial assistance, the EU must still contend with three countries that have required billions of dollars in aid and are still not completely out of the woods with their financial challenges. For instance, Portugal hasn’t had a balanced budget or a surplus in more than 30 years and has amassed debt equal to more than 80% of the nation’s gross domestic product.
QUESTIONS FOR DISCUSSION:
- Should the EU and the IMF negotiate a rescue package with Portugal now or wait until after the national elections on June 5 when the issue of who is in charge of the country is answered?
- Portugal is Western Europe’s poorest country and its growth has trailed the rest of the euro zone over the past decade. How can the EU strike a balance between imposing austerity measures but yet still allowing a path for economic development for the country?
- European finance ministers met this weekend in Budapest and hope that the bailout of Portugal and the plans to adjust the temporary euro-zone bailout facilities created last year will draw a line under the trade bloc’s sovereign debt crisis. Will the debt crisis likely be contained to Greece, Ireland and Portugal?
SOURCE: Kowsmann, P., & Forelle, C. (2011, April 7). Portugal pleads for rescue. Wall Street Journal, pp. A1, A14. (Retrievable online at: http://online.wsj.com/article/SB10001424052748704101604576246294138576346.html)
Related video clip: Portugal Seeks EU Bailout. (Retrievable online at: http://www.reuters.com/news/video?videoId=200971046)
Related video clip: EU Considering Portugal Bailout. (Retrievable online at: http://www.reuters.com/news/video?videoId=201222729)