Monday, 10 January 2011

Two down, three to go: Portugal is next

Back in November, the Republic of Ireland came under pressure from France and Germany to accept an illegal bailtout from the EU.  Ireland, of course, said it didn't need a bailout and that it was worried about the loss of sovereignty associated with mortgaging the country to the EU but what little faith investors had left in the Irish economy was undermined and a week later they accepted a €100bn loan from the EU (including several billion from the UK) and IMF.

The required changes to the Lisbon Treaty to make bailing out member states legal have been made (another broken promise by Cast Iron Dave) paving the way for the next bankrupt Eurozone country to be bailed out.  Greece has already had €110bn from the EU and IMF, the Republic of Ireland has had £100bn and next on the list is Portugal who will be taking €80bn.

Portugal says that it doesn't need a bailout (like Ireland said) but France and Germany are trying to pressurise the Portuguese government into taking a bailout sooner rather than later (like they did to Ireland).  The French and German stock markets fell by about 1 and a half percent each and the FTSE fell half a percent on the news and the Americans are fretting about the risk of European sovereign debt.

Portugal is going to try to sell €1.25bn of bonds on Wednesday to get its hands on some cash and the interest rates are expected to be high.  Bonds are basically a type of loan taken out by governments from private markets with a guaranteed amount to be paid back on a specified date (assuming the country issuing the bonds doesn't default like Greece did).  The amount of interest investors demand on the bonds is an indication of the risk - if they think there's a chance the bonds will be defaulted on then they will demand a higher percentage rate, just like a high street bank does based on peoples' credit ratings.

On Thursday, Spain and Italy (the other two bankrupt PIIGS countries) will issue their own bonds to try and raise cash and how well they do will depend on Portugal's bond issue on Wednesday.  The ECB will probably buy more Portuguese bonds (it's already been buying up Greek, Portuguese and Spanish bonds to try and encourage investors) but as the ECB is the central bank of the failing Eurozone, it's a mystery how they expect investors to be reassured by their purchase of potential toxic bonds from the bankrupt PIIGS countries using their own money!

The order of the fall of the PIIGS has already predicted - "Portugal, Spain and Italy will be next" - Portugal will be bailed out in the next couple of weeks and then Spain will follow shortly thereafter.  Or will it?  Can EU member states (or the IMF for that matter) afford the €250-300bn it will cost to bail out Spain?  Will Spain be the straw that breaks the kamel's rücken and leads to Germany pulling the plug on the Euro?

The EU's political elite will defend the Euro and the EU project to the bitter end but the money will run out soon and Germany has been lucky so far to have pretty much escaped the consequences of the collapse of two Eurozone economies.  Next time they might not be so lucky and when the impending collapse of the Euro starts to hit Germans in the pocket they will be out of it.