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

Digital Project Manager/BA

£300 Per Day: Clearwater People Solutions Ltd: An experienced Digital/Ecommerc...

Creative Content Executive (writer, social media, website)

£30000 - £35000 Per Annum + 25 days holiday and bonus: Clearwater People Solut...

Test Lead (C#, Java, HTML, SQL) Kingston Finance

£40000 - £55000 per annum: Harrington Starr: A Global Financial Service Organi...

Access/Teradata Developer, Banking, Bristol £400pd

£375 - £400 per day: Orgtel: Access / Teradata Developer - Banking - Bristol -...

Day In a Page

Read Next
 

August catch-up: Waiting on the telephone, tribute to Norm and my Desert Island Discs

John Rentoul
Jihadist militants leading away captured Iraqi soldiers in Tikrit, Iraq, in June  

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

Robert Fisk
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home