Portugal is now expected to press for a package worth about ?90bn, roughly the same as Ireland and less than the ?110bn Greek bail-out. That?s equivalent to slightly more than half Portugal?s national output. Between ?20bn and ?25bn will have to be disbursed at the beginning of May, and Britain is on the hook for up to �4bn under the European Financial Stability Mechanism Alistair Darling signed in the last act before Labour lost power.
Politically, the timing is perhaps astute. The Portuguese government resigned office after the austerity measures were rejected, leaving them in a ?caretaking? role. Jose Socrates, the former prime minister and now acting prime minister, made it clear that he blames his rivals for precipitating the crisis by rejecting his reforms. The opposition, now favourite to take power, said they will support the request for a bail-out. Rescue will come with conditions ? probably the same as those already rejected, as they had been approved by the International Monetary Fund.
This time, though, it will be easier for the winner of the June 5 election to simply present the nation with the package as the fault of others and unavoidable.
The big question, however, is whether the bond markets will now turn on Spain. Three of the original PIGS are now down, will the fourth fall as well? Economists think not and the country also comfortably got a ?4.1bn bond auction away on Thursday. Spain may have a budget deficit of around 8.5pc of GDP, but its national debt at about 75pc of GDP, is on safer ground. Spain is also pushing through harsh reforms, increasing the pension age to 67, raising VAT, slashing civil servants? pay to get the deficit under control, and addressing its banking problems.
In the five months since Ireland?s rescue, Spain has moved mountains to differentiate itself from Portugal ? with some success. Spanish sovereign debt rates have stabilised over the past three months as investors have decided its public debt levels are on a sustainable path. Even with a massive ?70bn state-funded bank recapitalisation (7pc of GDP), analysts believe the country can grow its way back to health.
The differentiation is working. It needs to, because Europe cannot afford to let Spain fail.
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