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New Open Europe briefing: Portuguese bail-out could amount to €70 billion
Yesterday, the Portuguese government failed to win parliamentary approval for fresh austerity measures, leading the Prime Minister, José Sócrates, to resign, putting renewed pressure on Portugal's finances. This could leave the country without a permanent government for months, as new elections are not expected until May, at the earliest - hugely complicating any bail-out negotiations.
Open Europe estimates that to cover Portugal's deficit and bond repayments for three years, the bail-out would have to be between €60bn and €70bn.
However, the briefing argues that a bail-out is unlikely to solve any of Portugal's fundamental problems and it would be cheaper for the country to move straight to restructuring, combined with a limited cash injection from the EU and IMF.
Portugal's problems also illustrate why the reform package discussed today by EU leaders will not stamp out persistent tensions and increasing divergences between different countries within the eurozone.
Open Europe's economic analyst Raoul Ruparel said:
"A bail-out of Portugal now looks virtually inevitable. But the cases of Ireland and Greece clearly illustrate that the EU's strategy - to throw good money after bad - is failing. Rather than simply taking a bail-out, it would be better in the long run for Portugal to restructure its debt."
"A Portuguese restructuring package rather than just another bail-out would shift some of the cost away from taxpayers and onto investors. It would also allow Portugal greater flexibility to achieve the necessary reforms needed for long term stability."
"A new Portuguese government will have a clean slate on the issue of economic reform. It should use this fresh start to tackle underlying problems facing the economy through a debt restructuring, rather than just taking on more high priced debt in the form of an EU bail-out."
To read the full briefing, click here:
- Portugal is getting ever closer to asking for a bail-out. Following the resignation of Prime Minister José Sócrates, after a series of austerity measures were voted down by Parliament, Portugal is now without a permanent government. Due to constitutional rules an election is not expected until the end of May.
- In 2011, the country needs to refinance 25% of its national wealth - in relative terms, this is even more than Greece. The country's borrowing cost has been above 7% for 38 consecutive days. Greece and Ireland lasted 13 and 15 days respectively at these kinds of rates before asking for a bail-out.
- We estimate that a bail-out package for Portugal would need to be between €60 and €70 billion. This should allow Portugal to cover all bond repayments as well as any government deficits for three years.
- However, a bail-out is unlikely to solve any of Portugal's fundamental problems. Both Ireland and Greece are already looking to renegotiate their bail-out terms. This illustrates that short term loans are simply not sufficient.
- Portugal's cost competitiveness relative to Germany has decreased by 21% since the introduction of the euro. An increase in ECB interest rates, which is widely expected next month, will also lead to a decrease in the availability of credit and domestic demand in Portugal. This could cause Portuguese GDP - already estimated to shrink by 1.4% in 2011- to contract further.
- Although we expect a bail-out, we believe a more viable solution would be to restructure some of Portugal's debt. In the long run this may prove cheaper despite a larger initial cost, since, unlike in the case of a bail-out, it would cut Portugal's debt rather than increase it. It would also reduce the burden on taxpayers, instead transferring more of it to investors. Crucially, the longer Portugal waits, the costlier a restructuring will be for the country, since its debt is expected to continue to build up over the next three years.
- In order for a restructuring not to spread contagion to Spain, it would be best to combine it with a limited bail-out, which would involve smaller contributions from member states, since more of the cost is borne by investors.
- The hope is that Portugal will use the cash and breathing space, freed up through a restructuring, to invest wisely in its own economy, including pushing through more economic reforms. However, the country will still be stuck with an over-valued currency, and the unanswered question of whether it can ever become competitive as long as it shares a currency with radically stronger economies such as Germany.
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