With Portugal asking for help, Europe now has three basket cases whose begging bowls have or will be filled with 275 billion euros of aid from the European Union and the International Monetary Fund.
The move by Portugal came a day before the European central Bank raised rates by 0.25% to 1.2%, heaping more pressure on Portugal and the other suffering smaller economies of Europe, Greece and Ireland.
So the P in PIIGS has gone, following the I and the G: Greece and Ireland were bailed out last year in at times acrimonious talks that remain unfinished in the case of Ireland’s 85 billion euro package.
Spain and Italy are left standing, with commentators confident they won’t go the way of the others.
Prime Minister Jose Socrates confirmed that his caretaker government had decided to ask the European Commission for financial help.
Moody’s Investors Service has triggered the last act of Portugal’s agony on Tuesday when it cut the country’s ratings by a notch from A3 to Baa1 and warned that it expected the country to have to seek outside help to resolve its debt problems.
That seemed to galvanise the markets and Portugal’s big banks and sections of the caretaker government, because an awful lot happened in around 36 hours as the country went from denial to acceptance that it needs help.
That has now happened and market estimates suggest Portugal could need 80 billion euros. Ireland received 85 billion from the EU and International Monetary Fund and Greece got 110 billion from both.
With doubts that Portugal would be able to meet a 4.2 billion euro bond repayment and interest payments due on today week, April 15, and another 4.9 billion due in June, the pressure on Portugal proved too much.
Judging by the problems that Ireland and Greece currently face with too much debt, too little growth, and prospects of years of stagnation, Portugal is entering into a special kind of financial hell.
Greece has put off trying to go back to the markets next year and is facing growing pressure from domestic critics to bring on a restructuring of its debt, which is a nice way of saying default, or use the threat of it.
At least Greece got 1% off its interest rate cost for its package, Ireland is still trying and facing objections from Germany and France who want Ireland to boost company taxes.
Ireland has resisted that and wants to link its interest cost to growth rates in it and Europe’s economies. Ireland has a smart, efficient work force (but dumb banks and a local business class still in denial).
Portugal has little of those benefits, or the tourism attracting ability of Greece.
It has been a virtual economic backwater for the past decade, growing slowly, but not adjusting and trying to make it more efficient.
That sloth has now caught up with it as did the government fiddling in Greece and the corrupt and incompetent banks and some politicians bringing Ireland down.
Now the banks, hedge funds and other sharks will start circling the bigger economies of Spain and Italy: both behemoths with GDPs of well over 1 billion euros.
Bringing one of them down would not only rattle Europe, but shake the global economy in a way that the failure of Lehman brothers in September 2008 pushed us off the cliff.
If Spain needs a bailout, there’s now not enough money left in the pot in Europe for that.
But Spain remains in doubt, despite an improvement in its banks and attempts to force the weak domestic savings banks to merge and cut their bad debts.
The Spanish government denied it would be next, a number of analysts said that Spain’s position was very different to those of Greece, Ireland and now Portugal.
The comments are similar to those from Ireland and Portugal before they asked for help, but Spain is a much bigger economy with stronger financial resources and a more committed Government.
Italy is currently transfixed by the start of the under age sex charges against Prime Minister Silvio Berlusconi with talk of "Bunga Bunga" parties.
Portugal was considered next on the list after ireland was bailed out last November, but denied it would fail and turned and twisted to avoid what many thought was the inevitable happening.
The request ended the country’s two week struggle to avoid the unpalatable after the minority government resigned when opposition parties rejected an austerity budget (the fourth in a year) that would have cut deeper into the deficit and perhaps given the country more time to adjust without help.
But since that resignation, the country has seen rates on its 10 year bond peak above 10% as investors grew scared that it would collapse.
A short term refunding move on Wednesday was a last ditch attempt to keep the inevitable at bay and on Tuesday some of the country’s big banks said they might stop buying government debt if a bridge loan from Europe of $US21 billion wasn’t sought.
The irony is that the same government which resisted a bailout when in government accepted the need for one two weeks into caretaker mode.
"In this difficult situation, which could have been avoided, I understand that it is necessary to resort to the financing mechanisms available within the European framework," said finance minister Fernando Teixeira dos Santos.
“The country was irresponsibly pushed into a very difficult situation in the financial markets,” the minister said, referring to the defeat of the minority socialist government in a key vote on austerit
