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

iJobs Job Widget
iJobs General

SAP Data Migration Consultant

competitive: Progressive Recruitment: My client, a FTSE 100 organisation are u...

Programme Support, Coms, Bristol, £300-350p/d

£300 - £350 per day + competitive: Orgtel: My client, a leading bank, is curre...

Linux Systems Administrator

£33000 per annum + pension, 25 days holiday: Ashdown Group: A highly successfu...

(Junior) IT Systems Administrator / Infrastructure Analyst

£28000 - £32000 per annum + pension, 25 days holiday: Ashdown Group: A highly ...

Day In a Page

Read Next
Is tackling child abuse in the courts the best solution?  

Child abuse and the moral entrepreneurs who cash in on it

Boyd Tonkin
Scotland’s First Minister, Alex Salmond, left, is to take part in a live television debate about Scottish independence with Alistair Darling, right, head of the Better Together campaign, if David Cameron continues to refuse to take part  

How a polite message from Canada inspired the campaign against Scottish independence

Andrew Grice
A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice