Eurozone Debt Crisis Could Still Spread
The New York Times reports:
LONDON — European officials, increasingly concerned that the Continent’s debt crisis will spread, are warning that any new rescue plans may need to cover Portugal as well as Ireland to contain the problem they tried to resolve six months ago.
Any such plan would have to be preceded by a formal request for assistance from each country before it would be put in place. And for months now, Ireland has insisted that it has enough funds to keep it going until spring. Portugal says it, too, needs no help and emphasizes that it is in a stronger position than Ireland.
While some important details are different, the current situation feels eerily similar to what happened months ago in Greece, where the cost of borrowing rose precipitously.
European authorities stepped in with a rescue package, expecting an economic recovery and the creation of new European rescue funds to fend off future panics by bond investors whose money is needed by countries to refinance their debt.
But with economic conditions weakening, markets are once again in turmoil. Rescuing Ireland may no longer be enough.
Stronger countries and weaker countries using the common currency of the euro are being pulled in different directions.
Some economists wonder if unity will hold or if some new system that allows countries to move on one of two parallel financial tracks is needed.
Despite the insistence of Irish officials that only its banks need additional help, investors continue to bet on an Irish rescue, driving down the bond yields on that country’s debt against a benchmark again on Monday.
Portugal’s yields increased to 6.7 percent, underscoring the emerging concern in Brussels, the administrative center of the European Union, that it would be irresponsible to adopt a plan to prop up Ireland without addressing the possibility that turmoil could ultimately engulf Portugal, or even Spain. Like Ireland, Portugal has struggled to grow under the fixed currency regime of the euro. Though Portugal has raised enough funds of late from bond markets, its budget deficit is 9 percent of its gross domestic product, much higher than the 3 percent limit for countries in the euro zone. With its weak government and slow growth, investors have grown fearful that Portugal, too, will eventually run out of funds.
While Ireland has largely impressed European officials with its commitment to austerity, Portugal has been lagging in this regard, according to European officials. One official in Europe, who asked for anonymity because he was not authorized to speak publicly, said that the budget recently presented by the government in Lisbon did not contain the type of far-reaching changes proposed by other countries, like Spain.
“If Ireland were to ask for aid, then you’d have to look at what’s going on in Portugal as well,” the official said, putting forward a view rescuing Ireland alone would not keep speculators from other vulnerable countries.
