By: Dr. Mike Campbell
Whilst Portugal waited for the deal with the EU and IMF to be finalised, it had to turn to the markets to secure €1billion in short-term funding. The issue of a 2-month bond was successful, but at a price. The Portuguese had to offer 4.66% interest for the vehicle which was marginally higher than the rate it had to pay for similar loans recently.
The market is still willing to provide funding to Portugal (at a price), suggesting that it continues to be confident that the country will not default on its obligations. Portuguese debt currently stands at 93% of the nation’s GDP and analysts predict that it will worsen to 107% next year before improving. Portuguese unemployment stands at 12.4% which is its highest level in 30 years.
Currently, the cost of servicing her debts through the markets costs Portugal 10% on its two-year bonds. The EU finance ministers have given their approval to the EU/IMF bailout package for Portugal which will make €78 billion available to the country. The bailout is not an act of charity since Portugal is being asked to pay 5.7% interest on the loan. With the bailout money in place, Portugal should not need to go to the markets for further funding for another two years. The EU is predicting that Portugal’s economy will probably shrink by 4% over the next two years. Concern has been voiced that the austerity terms required by Portugal’s EU partners may hamper the country’s recovery.
The IMF is at pains to stress that the arrest of its head, Dominique Strauss-Kahn on charges of sexual assault, has had no effect on it is ability to function.