Leading article: A crisis that could yet spread far beyond Portugal's borders

Lisbon's dilemma is compounded by the risk of falling foul of the bond markets

Share
Related Topics

It now seems increasingly likely that within the next few days Portugal will have to seek a £70bn bailout from the European Union and International Monetary Fund. That is bad news for Portugal, for Spain, for the euro and, indirectly, for the UK too. The crisis has come to a head with the resignation of Portugal's prime minister José Sócrates, after his minority administration failed to receive support from opposition parties for yet more tax rises and spending cuts. Failure to approve the austerity measures threatens to push high government borrowing to unaffordable levels. That would make Portugal the third eurozone nation, after Greece and Ireland, to be forced to apply for outside help.

The situation highlights a dilemma which stretches well beyond Portugal's shores. Most politicians there oppose harsher austerity. They have already raised taxes and implemented the deepest spending cuts in more than three decades.

To cut too far and too fast, they have argued, in an echo of the Labour party's stance in the UK, risks falling into a downward recessionary spiral as Ireland has.

Mr Sócrates believes that the only way to keep the ratings agencies happy is a tough deficit-reduction programme and a gamble on growth. But that does not look a risk-free strategy, as George Osborne has found with the independent Office for Budget Responsibility forecasting that growth here would be slower this year and next, than it thought last October.

In addition, high-street spending fell by 0.8 per cent last month as consumer confidence was walloped by the increase in VAT, rising petrol prices and general economic sluggishness. Recovery will be painfully slow or may be seriously delayed. The Portuguese dilemma is further compounded by the risk of falling foul of the bond markets and ratings agencies. Austerity measures will be even tougher, Mr Sócrates warned yesterday, if the IMF were brought in.

The other big risk is that the Portuguese contagion could spread to neighbouring Spain where the rating agency Moody's has just downgraded 30 smaller Spanish banks. On the same day Moody's warned that the UK's coveted AAA rating could be at risk if growth remains sluggish. Spain is in a significantly better position than Portugal but the possibility of a run on a country is always present when markets are panicky.

Europe's political leaders, who gathered yesterday for a "whatever it takes to save the euro" summit in Brussels, know that well enough. The euro dropped to a low of $1.4049 on news of the resignation of Mr Sócrates – whose austerity measures were backed by the EU and European Central Bank – though the currency recovered a little yesterday. No wonder the German Chancellor Angela Merkel has urged all parties in Portugal to get behind the austerity programme.

But Portugal's biggest party, the Social Democrats, while paying lip service to the need to reduce the deficit, will not back more cuts. Things can only get worse now that a political crisis has been added to the economic one. Lisbon's main stock market index fell by almost 1 per cent on Wednesday, though it rallied yesterday. The cost of insuring against a default on Portuguese sovereign debt rose. Portugal faces redemptions of £18bn of bonds in the next six months. Meanwhile people have begun to vent their frustration on the streets.

From Britain's point of view, any inclination to draw comfort from our non-membership of the euro would be a mistake. Apart from the fact that our 13.5 per cent commitment to the European Stability Mechanism fund could land us with a £3bn bill if Portugal defaults, our own growth-led recovery relies on boosting exports to our biggest market – the eurozone.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Lettings and Sales Negotiator - OTE £46,000

£16000 - £46000 per annum: Recruitment Genius: This is an opportunity to join ...

Recruitment Genius: Home Care Worker - Reading and Surrounding Areas

£9 - £13 per hour: Recruitment Genius: This is a great opportunity to join a s...

Recruitment Genius: Key Sales Account Manager - OTE £35,000

£25000 - £35000 per annum: Recruitment Genius: Have you got a proven track rec...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

Read Next
David Cameron visiting a primary school last year  

The only choice in schools is between the one you want and the ones you don’t

Jane Merrick
Zoë Ball says having her two children was the best thing ever to happen to her  

Start a family – you’ll never have to go out again

John Mullin
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn