David Prosser: Time running out to stem euro contagion

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The Independent Online

Outlook: The European Union and the International Monetary Fund insist they are moving speedily to agree a deal to shore up Greece's parlous public finances. They had better redouble their efforts.

Yesterday's downgrading of the credit ratings of Greece and Portugal yet again underlines the fact that this sovereign debt crisis is still to be properly resolved – both in Athens itself, and in many of the other eurozone economies threatened by contagion.

What's happening in Portugal has worrying echoes of the way in which Greece's crisis developed. There is a discernible pattern. First, speculation that Lisbon's debts are unsustainable prompted reassurance from the Portuguese government and the European Central Bank that borrowing was manageable. Then the markets began suggesting otherwise, hiking up the cost of credit default swaps on Portuguese sovereign debt. Next came the credit downgrade (as ever, the ratings agencies seem to follow the markets, rather than vice versa). Will we get a full-blown run on Portugal, as we saw in Greece? Don't rule it out.

One difficulty for the Greek government was that people simply did not believe its promises – not least because its borrowing figures were wilfully understated in the run up to the crisis. Portugal does not stand accused of such deception, but one of the lessons of this crisis has been that the dividing line between fact and fiction often does not matter. If so many people believe that you will not pay off your borrowing that the cost of debt rises ever higher, it becomes a self-fulfiling prophecy.

Dealing with the Greece problem is the first step in restoring confidence in the ability of countries such as Portugal to avoid becoming basket cases too. Cure the first patient of his ailments and you snub out the possibility of the infection being passed on.

Germany's Angela Merkel faces some horrible decisions. A deal for Greece, even with the IMF shouldering most of the cost of the bail-out, is deeply unpopular with her domestic electorate and Ms Merkel faces local elections in 10 days' time. But every day that a deal for Greece is not forthcoming is another day in which the eurozone's crisis will spiral further out of control.

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