Admitting the problem is the first step – and it appears Portugal is close to starting this 12-step program. The Financial Times reports:
Portugal is in the midst of a political crisis following the resignation of the prime minister José Sócrates yesterday (24 March) following his parliament’s rejection of fresh spending and deficit cuts.
Mr Sócrates had said he would be unable to run the country unless the cuts were passed.
His resignation leaves a political void in a country where national debt is hovering at around 85 per cent of the gross domestic product and steadily increasing due to Portugal’s sluggish one per cent rate of economic growth.
Interest rates on Portuguese government bonds soared amid fears Mr Sócrates departure would make it difficult for Portugal will to refinance around €9bn in. (Source: FTAdviser.com)
But, does it matter?
As our intrepid correspondent, Euro bond expert Dr. Evil often reminds us – Portugal is small potatoes. In and of itself, it does not really in fact matter at all.
The real elephants in the room are Spain and Italy. And my, what big elephants they are!
Back in December we wrote the following about Spain:
Dr. Evil pointed out to me that there are currently ongoing lawsuits in German constitutional courts that may indicate Germany would block any additional funds from being routed towards Spain (and recent actions would indicate the Germans are in no mood to bailout anyone else – see their quick dismissal of a recent proposal to double Europe’s rescue fund for sovereign debts).
If Spain goes down,and Germany passively watches, then look out below – Europe would be in for some massive debt deflation pain.
And if the possibility of Germany turning the cold should to Spain wasn’t scary enough – it may not matter what Germany decides to do about Italy, the real 800-pound gorilla. If (more like when) Italy goes down, it’s going to go down hard – we wrote in January:
And the REAL elephant in the room, as our astute correspondent Dr. Evil has frequently pointed out, it Italy – spreads on Italian debt continue to break out, signaling a big fat RED FLAG:
Source: Bloomberg.com
With Italy’s debt-to-GDP ratio of approximately 120%, these rising yields are a very serious matter. A bailout of Italy would run a cool trillion or two – not an option with the current funds in the EU bailout piggy bank.
So while Portugal heads for a bailout, we know that this will blow over, at least temporarily. But with the canary in the coalmine looking pretty damn sick, it remains unclear who will – or even can – bail out the elephant miners following close behind.
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