Is it 50 billion euros? Or perhaps 70 billion euros? The cost of bailing out Portugal varies according to who makes the calculation. No one will know the real price until officials from the International Monetary Fund and the European Central Bank tell us.
But it isn’t the actual amount that counts. It is the price the euro area is paying for having a single currency.
And on that measure, a rescue package for the beleaguered Portuguese economy comes with far too high a price tag attached. It will raise too many questions about whether the euro can ever be made to work; it will mean there is no longer a firewall that stops the crisis from spreading to Europe’s core; and the Portuguese don’t seem willing to accept the same type of austerity package that Greece and Ireland got.
For all three reasons, the last thing the euro area can deal with right now is a Portuguese rescue.
It now seems inevitable that Portugal will be forced to accept a bailout from the rest of the euro area. Last week, the country’s parliament rejected the package of budget cuts proposed by Prime Minister Jose Socrates, prompting him to offer his resignation. Fitch Ratings and Standard & Poor’s both lowered the country’s debt rating, and bond yields soared.
The country needs money. It faces redemptions valued at about 9 billion euros ($12.7 billion) in total on April 15 and June 15, perhaps around the time of early elections to choose a new government. Portugal intends to sell as much as 20 billion euros of bonds this year to finance its budget and cover maturing debt. Right now, it doesn’t look as if the markets are willing to come up with that kind of cash. That leaves the euro area and the IMF as the only viable alternative ― the same way it was for Ireland and Greece.
The money can be found if it has to be. A bill for 70 billion euros won’t bankrupt Germany or France. But just because you can afford something financially doesn’t mean you can afford it in other ways. The euro area can’t take the cost of bailing out Portugal. Here’s why.
First, there’s no easy explanation for why Portugal needs a rescue. Greece got into trouble because it fiddled its way into the single currency. It never really met the entry criteria in the first place, and its first application was quite rightly turned down. Ireland had a huge property and banking bubble, which then popped, plunging the economy into a deep recession. In both cases, you could argue that some external event created the crisis. It wasn’t the single currency as such.
But Portugal? It didn’t fiddle any figures or have any kind of bubble. Ever since joining the euro, the country has had low growth, and that has worsened its debt position.
It is hard to conclude that the problem was anything other than the currency itself ― and the way it affects countries that aren’t able to stay competitive with Germany. After this bailout, it will be impossible to claim that the euro represents a functioning monetary system with just a couple of rogue members. Its flaws will be impossible to ignore.
Second, once Portugal is bailed out, the hard questions are raised. For the last three months, the markets have been focusing all their firepower on this one tiny country on the western edge of Europe. Whether it is bust or not has never been a huge deal. It is the questions that come next that matter.
Once Portugal is out of the way, the markets will start looking hard at Spain and Italy. And they will probe the stability of the euro area’s banking system. The answers may well turn out to be explosive. Portugal has been a kind of shield ― and without it, the euro will look a lot more exposed.
Third, the Portuguese don’t look willing to play by the rules ― at least as they are written in Frankfurt and Brussels. The indebted, peripheral countries are meant to accept massive austerity programs, and to allow the ECB and IMF to effectively run their economies. But the results elsewhere haven’t been encouraging. Greece is still stuck in a recession, and bond yields remain high. Ireland’s economy sinks further into the mud. It is no surprise the Portuguese have looked at the results of the medicine and wondered if it is a treatment they need.
But if the Portuguese refuse to accept the austerity measures, what is Plan B? So far there hasn’t been any sign that anyone has thought of one.
The euro area can pay for a Portuguese bailout. The 70 billion euros won’t matter much. But the final bill will end up being much costlier.
By Matthew Lynn
Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a book on the Greek debt crisis. The opinions expressed are his own. ― Ed.