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Portugal has been the financial-market equivalent of a dead man walking ever since José Sócrates resigned on 23 March
It took Portugal's prime minister, José Sócrates, two weeks to accept the inevitable but he finally got there. By calling on Brussels for an emergency loan, Mr Sócrates was indeed taking the most drastic of all measures available to him – but he was also only doing what European policymakers, financial markets and many Portuguese had been expecting for days.
In truth, Mr Sócrates ran out of options on 23 March, when he resigned as prime minister after failing to get yet another austerity programme of spending cuts and tax rises through parliament. That evening Portugal entered political limbo – and became the financial-market equivalent of a dead man walking. Borrowing costs for the state have been on the rise for over a year now, but in the past two weeks they have ratcheted sharply upwards. When officials in Lisbon tried to raise €1bn in short-term credit, financiers charged them 5.12% for a loan of six months, up from 2.99% at the start of March. By way of comparison, at current rates the German government is charged only 3.42% for a loan lasting 10 years. In effect, this was a buyers' strike: cash was just about available – but at such high interest rates that you'd almost rather not have it.
Had that situation continued much longer, Portugal would have needed to borrow an ever-increasing amount from financiers just to pay the interest it owed them.
Details of the Brussels package will take some time to be negotiated – although European commission's president José Manuel Barroso promised that all would be processed as swiftly as possible – but some important basic points can be made now.
If the package is anything like that offered to Greece and Ireland, Portugal will not get a handout, but a loan facility – and it will not come cheap. Dublin has got its emergency loans for over seven years, but they are at just below 6%. That is better than financiers would offer, no doubt, but punishing enough that the newly-appointed premier Enda Kenny is campaigning for a bit more slack. Under their EU/IMF bailouts, Greece and Ireland are still saddled with a massive debt burden that will drag on their economies for many years to come.
Lisbon is likely to get much the same treatment. Without the option to devalue their currencies or to default on their debt, all three countries face a mini-depression – contracting or near-stagnant economies and rocketing unemployment.
One big consequence of the Portuguese bailout is that investors are bound to ask if Spain is next. After all, Spain's trade with neighbouring Portugal is worth 10% of its GDP and three of its biggest banks have Portuguese subsidiaries. All the same, Spain is not in the same boat as Portugal or indeed the rest of southern Europe – its public finances have historically been run with far more discipline than in Greece, and it is well into programmes to reduce government borrowing and clear up its troubled saving-banks (or cajas). Markets have been inclined to give Madrid the benefit of the doubt so far; when the Portuguese government finally collapsed in March, it was notable that Spanish borrowing costs barely rose.
Spain is an economy almost too big for the eurozone to fail, and much of the effort in the eurozone over the past year has been expended on putting it behind what officials and financiers refer to as a firewall. If those efforts have succeeded – and despite all the economic rationalism, it is a big if – then Portugal will appear to be the climax of the Great Eurozone Crisis of 2009-2011. That is a result that many eurocrats will see as at least half a victory. But some tense weeks lie ahead before we can know that. And in the meantime three European countries – Greece, Ireland, Portugal – will have been forced to seek financial rescues that will lead to years of austerity. Some victory.