For those with long memories, it was a bit like Britain on Black Wednesday in 1992, writes Larry Elliott
And so the third domino falls. There was an inevitability about Portugal's decision to accept it needs a bailout from the European Union to survive its increasingly burdensome financial crisis.
The key moment came when Lisbon announced the results of a bond auction. Money was raised from the markets, but at an extortionate price, and the caretaker government was faced with a simple choice: borrow from the markets at 10%, or borrow from the rest of Europe at perhaps half that rate.
For those with long memories, it was a bit like Britain on Black Wednesday in 1992. For months and months, policymakers insist there will be no surrender, no U-turn, no change in policy. Then, suddenly, it becomes clear that events have taken the decision out of the government's hands.
What does this mean? First, it certainly does not mean that life is going to get easier for Portugal, as the Greeks and the Irish can testify. Financial help comes with strings attached, and those strings mean the sort of austerity that led to the collapse of José Sócrates's government. Second, a bailout will not change the fundamental problem of an economy struggling to remain competitive within monetary union. The cost of Portuguese goods has risen more quickly than those of Germany, and, without the safety valve of devaluation, there will have to be a relentless and long period of deflation to reduce domestic costs. Further strikes and unrest look very likely.
Third, the timing is significant. It is the closest thing to a certainty that the European Central Bank will raise interest rates. You have not needed to be a genius to interpret the smoke signals that have been coming out of Frankfurt. The ECB is alarmed at the recent trends in inflation and is going to respond by making borrowing dearer.
Higher interest rates attack inflation by slowing growth and by pushing up the cost of servicing debts: the worst possible news for Greece, Ireland and Portugal, which are struggling to cope with high budget deficits and recession-mired economies. It is possible, following the announcement, that markets will take a more sanguine view of the path of European interest rates for this year and beyond because, while the ECB sets monetary policy for the whole of the single currency zone, it cannot be indifferent to the effect of its policies on the vulnerable periphery.
Finally, there is the question of Spain. Here, the news has been better, with the spread between Spanish and German bonds narrowing slightly at a time when yields on Portuguese and Irish debt have been rising. The hope is that Spain has decoupled itself from its Iberian neighbour despite its poorly performing economy. European policymakers must hope that is correct, because Spain is a different proposition from Portugal. It is too big to fail, and too big to rescue.