As EU agrees crisis plan, Portugal woes steal show

Associated Press
European Council President Herman Van Rompuy speaks during a media conference at an EU summit in Brussels, Friday, March 25, 2011. European Union leaders have given their final approval on a raft of new measures they hope will contain the debt crisis that has rocked the continent for more than a year. (AP Photo/Virginia Mayo)
.

View gallery

The European Union sought Friday to draw a line under the government debt crisis to keep the market turmoil that is pushing Portugal toward a bailout from infecting other larger debt-heavy countries.

But as EU leaders in Brussels signed off on their "comprehensive package," Portugal's financial jitters worsened. Its 10-year bond yields rose to 7.80 percent, a record high that shows investors fear the country might not be able to roll over its debt.

Portuguese officials have said that's more interest than they can pay — and they need to tap bond markets by June at the latest.

A top European Union official said the EU had the financial muscle to rescue Portugal. It already has bailed out Greece and Ireland, whose troubled government finances led to their being effectively cut off from bond borrowing and needing help to avoid default.

"If Portugal asks for help, then it would be assumed that this would happen shortly, and in that case the rescue shield would be enough," said Jean-Claude Juncker, the prime minister of Luxembourg and the main spokesman for the group of countries that use the euro.

Portugal's crisis took the shine off the second and final day of the EU summit. Leaders put the final touches on an agreement to set up a permanent, €500 million ($706 million) bailout fund to replace the temporary one that expires in 2013, and new rules for closer economic cooperation to prevent more crisis. They have also boosted the temporary bailout fund so it can lend its full €440 billion ($622 billion) allotment, instead of keeping some of that back as reserves to ensure a top bond rating. Countries bailed out after 2013, meanwhile, will get lower interest rates on emergency loans.

They had hoped that those moves, mostly agreed in past weeks and being sealed Friday in their summit statement, would represent a "comprehensive package" that would help calm the turmoil on the bond markets. "I think that the comprehensive package that we have completed will be enough to convince financial markets that we are firmly resolved to guarantee stability in the euro zone," Juncker said.

But Portugal's political crisis has undermined that.

Prime Minister Jose Socrates resigned Wednesday after the opposition refused to vote for additional budget cuts and revenue increases aimed at cutting the governments deficit. He is still in office as a caretaker, but many analysts say Portugal will need financial help before a new government can be elected.

The country must roll over some €9 billion ($12.7 billion) in expiring debt in April and June.

Fitch and Standard & Poor's ratings agencies both downgraded Portugal's debt on Thursday in the wake of Socrates' resignation.

"The resulting increased political uncertainty could hurt market confidence and heighten Portugal's refinancing risk," Standard & Poor's said.

Portuguese opposition leader Pedro Passos Coelho says Socrates no longer has the mandate to negotiate a bailout, but elections will not be held until May or June.

President Anibal Cavaco Silva, a figurehead who has no government rule but can act as a facilitator, was asking parties Friday whether they would voluntarily form a coalition government or demand new elections.

The debt crisis is so far hitting smaller countries outside the French-German economic "core" of the euro union. They got in trouble in various ways during the past several years of financial and economic turmoil; Ireland ruined its budget by bailing out collapsed banks after a real estate bubble, while Greece overspent and fudged its budget figures. Portugal has an underpowered economy and weak exports that make it hard to pay debt.

The bailout fund prevents a government from having to default or restructure its debts. That could shake up financial markets, hurt already fragile banks that hold government bonds, and make investors more reluctant to lend to governments.

Still, it is being done at the price of having taxpayers in financially solid countries put up money to rescue ones that didn't manage affairs as well. That goes down poorly with voters in the solid countries, particularly Germany, which as the largest euro country has the biggest rescue bill.

Commerzbank economists Joerg Kraemer and Christoph Weil said that the bailout fund took pressure off troubled countries at the cost of making monetary union a "transfer union" as well, where the debts of some can weigh on all.

"This means that countries with a strong credit rating will de facto be transferring some of this good rating to those whose credit rating is weaker," they said in an assesment of the summit. "This provides an incentive for a country to live at the expense of others and be careless in its budgeting."

View Comments (0)