By: Dr. Mike Campbell
The Portuguese prime minister has tended his resignation after parliament rejected his fourth round of austerity measures. The latest round of financial belt tightening was designed to take further strides into getting Portugal’s sovereign debt burden under control and involved additional spending cuts and tax increases. The package was rejected by all five of the opposition parties. The Prime Minister, Jose Socrates, said that he would be unable to continue to govern unless the measures were passed.
The development in Portugal makes it more likely that the country will become the third Eurozone member to require EU/IMF funding – a situation which was strenuously denied by the government until recently. The yield on Portuguese bonds has risen with ten-year bonds now commanding a rate of 7.52%, a new record high. The greater the yield on Portugal’s bonds, the more it costs the nation to service its existing debt which is achieved by bond issues. Yields for Greek and Irish bonds, in turn, became prohibitively expensive, forcing both nations to accept EU bailout funding. In Ireland’s case, the move was partially to assuage fears that sovereign debt would cripple the Euro and the move brought renewed confidence to the markets that the block would take decisive action for the common good.
How Portugal Must Behave
Portugal will need to agree to stringent conditions imposed by other EU members if it is to benefit from the bailout. The market has long anticipated that Portugal will need a bailout and initial market reaction to developments in Portugal has so far been muted.
Coincidentally, Eurozone leaders begin a two-day summit in Brussels today which is aimed at finalising details of a "grand bargain" to deal with the 17-nation group's debt burden.