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Nervous eurozone investors look to Spain after Portugal asks for loan PDF Print E-mail
News - Latest
Thursday, 07 April 2011 07:52

Portugal’s admission that it needs financial help in the form of a bail out from the European Union will not heal the eurozone crisis and investors are already looking to what might happen in Spain.

Initially today (Thursday April 07) European shares rose but traders were wary that the bailout may not signal the end and are now watching to see if Spain could be next, although the Spanish Economy Minister Elena Salgado said contagion was ruled out.

‘We all knew Portugal was going that way, Spain looks like it is in a better position, but it is a bit early to say everything stops with Portugal,’ said Will Hedden, sales trader at IG Index.

Portugal's caretaker government said yesterday that it had decided to seek financing from the European Union in an abrupt turnaround after resisting a bailout for months despite sharply deteriorating financial conditions.

The nation of 10.5 million is the third member of the euro zone to seek a rescue after Greece and Ireland after months of fending off market pressure to request assistance, as borrowing costs soared amid deepening political instability.

Prime Minister Jose Socrates said in a televised statement that parliament's rejection of additional austerity measures last month had aggravated the financial situation, ultimately making the request for aid inevitable.

‘I tried everything, but in conscience we have reached a moment when not taking this decision would imply risks that the country should not take,’ he said.

Socrates cited no figure but officials estimated Lisbon is likely to need between €60 and €80 billion over three years. The IMF said it had not yet received a request from Portugal for financial assistance but it stood ready to help.

Portugal's position worsened when the minority Socialist government resigned on March 23 after the parliamentary defeat, casting the country into political limbo. An early general election is set for June 05. Bond yields spiked, ratings agencies downgraded sovereign and bank debt, and local banks warned this week they may no longer be able to buy government paper.

The European Commission's top economic official, Olli Rehn, welcomed the Portuguese decision, saying it was in the interest of the 17 nation single currency area as a whole. ‘This is a responsible move by the Portuguese government for the sake of economic stability in the country and in Europe,’ Rehn told Reuters.

EU officials will now be working to prevent financial market contagion spreading beyond Portugal, especially to Spain, which has undertaken major economic reforms, budget cuts and a banking clean up to try to stay out of danger.

Portugal has implemented a series of spending cuts, tax rises and wage curbs and the government proposed further measures to reduce the public deficit to 4.6% of gross domestic product this year after missing last year's 7.3% target. Following a restatement of public accounts, the 2010 deficit came in at 8.6%.

A European Commission statement said Socrates notified Commission President Jose Manuel Barroso of Portugal's intention to ask for the activation of EU financial support mechanisms and Barroso assured him that the request will be processed as quickly as possible but emergency loans are normally only disbursed once there is a signed agreement with a fully empowered government, ratified where appropriate by parliament.

Euro zone and EU finance ministers are due to meet in Budapest tomorrow to discuss Portugal's financing needs. Although Portugal's public debt is lower than Greece's or Ireland's at 92 percent of GDP in 2010, the country's chronic slow growth has raised long term doubts about its solvency.

 

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