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: Business Analyst - 12 Month FTC - Entry Level

£23000 - £27000 per annum: Recruitment Genius: A Business Analyst is required ...

Recruitment Genius: Chefs - All Levels

£16000 - £23000 per annum: Recruitment Genius: To succeed, you will need to ha...

Recruitment Genius: Maintenance Engineer

£8 per hour: Recruitment Genius: This is an opportunity to join an award winni...

Recruitment Genius: Telesales Executive & Customer Service - Call Centre Jobs!

£7 - £9 per hour: Recruitment Genius: Are you outgoing? Do you want to work in...

Day In a Page

Read Next
George Osborne appearing on the BBC's Andrew Marr Show on Sunday, 5 July 2015  

George Osborne says benefits should be capped at £20,000 to meet average earnings – but working families take home £31,500

Ellie Mae O'Hagan
The BBC has agreed to fund the £650m annual cost of providing free television licences for the over-75s  

Osborne’s assault on the BBC is doing Murdoch’s dirty work

James Cusick James Cusick
Greece debt crisis: EU 'family' needs to forgive rather than punish an impoverished state

EU 'family' needs to forgive rather than punish an impoverished state

An outbreak of malaria in Greece four years ago helps us understand the crisis, says Robert Fisk
Gaza, a year on from Operation Protective Edge: The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas

Gaza, a year on from Operation Protective Edge

The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas
How to survive electrical storms: What are the chances of being hit by lightning?

Heavy weather

What are the chances of being hit by lightning?
World Bodypainting Festival 2015: Bizarre and brilliant photos celebrate 'the body as art'

World Bodypainting Festival 2015

Bizarre and brilliant photos celebrate 'the body as art'
alt-j: A private jet, a Mercury Prize and Latitude headliners

Don't call us nerds

Craig Mclean meets alt-j - the math-folk act who are flying high
How to find gold: The Californian badlands, digging out crevasses and sifting sludge

How to find gold

Steve Boggan finds himself in the Californian badlands, digging out crevasses and sifting sludge
Singing accents: From Herman's Hermits and David Bowie to Alesha Dixon

Not born in the USA

Lay off Alesha Dixon: songs sound better in US accents, even our national anthem
10 best balsamic vinegars

10 best balsamic vinegars

Drizzle it over salad, enjoy it with ciabatta, marinate vegetables, or use it to add depth to a sauce - this versatile staple is a cook's best friend
Wimbledon 2015: Brief glimpses of the old Venus but Williams sisters' epic wars belong to history

Brief glimpses of the old Venus but Williams sisters' epic wars belong to history

Serena dispatched her elder sister 6-4, 6-3 in eight minutes more than an hour
Greece says 'No': A night of huge celebrations in Athens as voters decisively back Tsipras and his anti-austerity stance in historic referendum

Greece referendum

Greeks say 'No' to austerity and plunge Europe into crisis
Ten years after the 7/7 terror attacks, is Britain an altered state?

7/7 bombings anniversary

Ten years after the terror attacks, is Britain an altered state?
Beautiful evening dresses are some of the loveliest Donatella has created

Versace haute couture review

Beautiful evening dresses are some of the loveliest Donatella has ever created
No hope and no jobs, so Gaza's young risk their lives, climb the fence and run for it

No hope and no jobs in Gaza

So the young risk their lives and run for it
Fashion apps: Retailers roll together shopping and social networking for mobile customers

Fashion apps

Retailers roll together shopping and social networking for mobile customers
The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy