So now we have the worst of all worlds in Europe.
Portugal, the third of the PIGS (Portugal, Ireland, Greece and Spain), has lost its government and there is now no one there to ask for a bailout, should one be needed, or to make the decisions to stave off one.
If Portugal is bailed out, attention will turn to Spain, the eurozone’s 4th largest economy.
José Socrates, Portugal’s prime minister, resigned on Wednesday night after losing a crucial vote on austerity measures.
That was the country’s 4th austerity package in a year and designed to keep the baying market and northern European budget hawks at bay.
Fitch downgraded the nation’s sovereign debt rating and the yields on Portugal’s 5-year, 3-year and 2-year government bonds all jumped to their highest levels since the launch of the euro, on expectations that Portugal will have to follow Greece and Ireland in seeking a financial rescue.
Raising fears about a knock on effect to Spain next door, Moody’s cut the ratings on 30 Spanish banks as well Thursday.
As a result, Europe’s debt markets were reminded that the continent has not escaped the 2010 pressures on the eurozone and the euro, even thought the two-day leaders summit that is supposed to resolve this problem started last night.
According to the Financial Times the resignation increases the changes of a bailout of Portugal by the European Union.
But the question is who would negotiate the bailout?
Mr Socrates has gone and the FT said the decision is up to Portugal’s conservative president. He may call an early election (two years ahead of the normal timing).
Mr Socrates’ minority government will remain in office in a caretaker capacity, but unable to negotiate.
There was no immediate comment from the president, but he is expected to call an election two years ahead of schedule.
And if that’s not bad enough, the two-day leaders summit has to settle Ireland’s objections to the terms of its bailout, especially the excessive interest rate.
Germany and especially France monstered Ireland at the March 11 leaders meeting and said they wanted Ireland to lift its 12.5% company tax rate (despite that rate being accepted in the terms of the bailout package last November).
In Ireland, the results of stress tests next week will reveal the true extent of capital needs at the country’s busted banks whose intemperate, corrupt and incompetent behaviour brought Ireland to its knees.
But Dublin reports last night said the government, in a change of strategy ahead of the summit, had decided not to press the interest rate question until the bank stress tests are completed.
Ireland won’t offer any concessions on the company tax issue and will instead push for the lowered rate at a eurozone finance minister’s meeting next month.
Dublin wants more help to manage the bank losses, threatening to push senior bondholders – who have so far avoided write-downs, into losses. That could raise the spectre of default.
The Financial Times said a German government and an EU official both said the chance of Ireland getting a better deal in its rescue loans at the summit was very low. Both officials declined to be named in line with department policy.
The summit though won’t be finalising the bailout packages, including the mechanism to apply from 2013 because of new German objections that Chancellor Angela Merkel brought to the table.
No wonder Europe is still in crisis.
The surge in short term rates are signalling the markets are starting to panic.
And yet most sharemarkets rose across the region as equity investors consigned the problems to the bond markets and political spheres.
No matter what anyone tries to say in Europe, the markets want some sort of resolution.
So stand by for Portugal to join Ireland and Greece and blame the country’s silly opposition parties.
They may end up having to drive the cost cuts and austerity to keep the country solvent and protect the euro.
