By: Dr. Mike Campbell
After three weeks of negotiations, the EU and IMF have agreed a rescue package for Portugal to help it to ensure that it can meet its debt obligations. Speculation that Portugal may not have been able to do so forced up the interest that Portugal had to offer on its bonds to attract investors, making default more likely in a viscous circle.
The EU/IMF package is worth €78 billion and Portugal will be given longer than anticipated to get its deficit under control. The convergence criteria for joining the Euro required that a nation’s deficit should not exceed 3% of its GDP. Whilst several countries have breached this level during the global financial crisis, they need to get their financial houses in order and return to running deficits within this level. The reason for this is that the Eurozone economies need to be in step to ensure the credibility of the Euro over the longer term. Portugal’s outgoing Prime Minister, Jose Socrates, resigned over his inability to pass a further austerity budget aimed at reducing the deficit to less than 3% by the end of next year. The current agreement sets this target back by a year to 2013.
The EU/IMF package requires the support (or at least the absence of opposition) of EU member states. The issue of the Portuguese bailout was a hot topic in the recent Finnish election, generating significant opposition. The Finns have yet to form a new government, but the Prime Minister-elect has suggested that he might put the matter to parliament before a government is formed. Finland would have the power to veto the bailout, in principal at least. It is unlikely that a new government will be in place before the EU vote to ratify the bailout package on 15 May. No matter how popular a refusal to agree to the deal may be in Finland, it is unlikely that any government would really want to block the deal, given the potential ramifications to the rest of the Eurozone members.