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Eurozone debt crisis: Portugal admits 'it could need EU bail-out'

Portugal has admitted that it could become the latest European Union country to seek a bail-out as the eurozone debt crisis deepened.



Minister for Foreign Affairs of Ireland Dermot Ahern Photo: GETTY

By Andrew Hough, Bruno Waterfield in Brussels, Robert Winnett and Heidi Blake 4:45PM GMT 15 Nov 2010

Fernando Teixeira dos Santos, the Portuguese Finance Minister, has warned that the fall out from concerns over Ireland's public finances could create a contagion affect among its neighbours.. "The risk is high because we are not facing only a national or country problem," he told Dow Jones new wires, in reference to the possibility that Lisbon will need international financial assistance.

“It is the problems of Greece, Portugal and Ireland. This is not a problem of only this country. This has to do with the euro zone and the stability of the eurozone, and that is why contagion in this framework is more likely. “It is not because markets consider we have similar situations. They are only similar in what concerns markets, but as I said they are very different.”

He added: “Markets look at these economies together because we are all in this together in the euro zone, but probably they could look different if we were not in the euro zone. “Suppose we were not in the eurozone, the risk of the contagion could be lower.” The Portuguese minister insisted that Portugal was improving its finances as it struggled with burgeoning public debt and deficit levels and later tried to back away from suggestions Lisbon was poised to call for help.

"Such a request is not imminent, there are no contacts, be it formal or informal," he said. "The rest are rumours and speculation." His words may have been an attempt to encourage Ireland's leaders to calm markets by dropping their own reluctance to take up a life-line from Brussels. The governor of the Bank of Spain also urged Dublin to act quickly by saying its indecision had increased jitters on financial markets.

Miguel Angel Fernandez Ordonez, a member of the ECB's governing council, told a banking conference in Madrid he expected an "appropriate reaction" by Ireland to help calm markets. He later added: "The situation in the markets has been negative due in some part to the lack of a decision by Ireland. It's not up to me to make a decision on Ireland, it's Ireland that should take the decision at the right moment."

Spain is one of several countries on the euro zone's periphery which has debt problems and has seen its borrowing costs spiral as investor confidence weakens. Greece, meanwhile, also admitted on Monday that it would breach conditions for a new installment of the 110 billion-euro (£93 billion) bailout as Greek public deficit and debt figures for the past four years were revised up sharply.

George Papandreou, the Greek Prime Minister, blamed Germany for the crisis. He said Berlin's demand that banks and bond markets share the pain of a sovereign debt default could push some euro zone economies towards bankruptcy. "It created a spiral of higher interest rates for countries that seemed to be in a difficult position, such as Ireland or Portugal," he said during a visit to Paris.

"This could create a self-fulfilling prophecy ... This could break backs. This could force economies towards bankruptcy." Earlier Ireland's justice minister refused to rule out the possibility of a bail-out for the beleaguered economy from Brussels that was considering the possibility of a £77 billion rescue package. Things are happening day by day," Dermot Ahern, told RTE television when asked whether he would promise that Dublin would not apply for financial assistance.

While the Irish government denied it would need a bailout a senior member of the European Central Bank confirmed discussions were under way with Dublin and said that aid, if requested, would be available for Ireland's banks or for the state itself. Irish officials were said to be considering pumping more cash into the country’s banks to push their capital above regulatory targets set in March in a bid to allay concern about rising loan losses.

EU sources confirmed to the Daily Telegraph that talks between the two sides about a rescue package had continued through the weekend. But Mr Ahern denied the existence of any discussions despite other officials confirming the Irish government was in talks with "international colleagues" on its budget woes. "There are no negotiations going on. If there were, the government would be aware of it, and we are not aware of it," he said, adding that he had spoken to Prime Minister Brian Cowen on Sunday and to Finance Minister Brian Lenihan.

Investors have rushed to sell Irish debts in recent weeks and there is growing speculation that if Europe fails to intervene there may be a run on other countries, including Spain and Portugal. Vitor Constancio, the European Central Bank Vice President, confirmed Ireland had been talking to European institutions but there had not yet been a formal request for assistance. "The Irish state is financed until part of next year, but it is also a problem of the banks that are at the centre of the problems in Ireland and considerations have to be pondered," he told reporters in Vienna.

He said such help, if needed, could involve the 440 billion euro European Financial Stability Facility (EFSF) set up after Greece was forced to seek help in May. The EU rescue package, seen as “very likely” by European officials, could cost the British taxpayers as much as £7billion following a deal agreed by Alistair Darling when he was still chancellor in the political limbo following the general election in May. Under its terms, Britain agreed to underwrite EU plans to rescue countries in difficulty.

David Cameron has publicly expressed support for steps to assist Ireland. Several British banks, particularly RBS, have exposure to Irish government debt amounting to billions of pounds and have watched their shares fall over the past week. Germany has been pressing Ireland to accept an EU-led financial rescue in order to calm international investors and to protect the euro-zone from a new debt crisis.

The PIGS at risk

Portugal
Government deficit: €15.7bn
Deficit as a proportion of GDP: 9.3 per cent
Government debt: €127.9bn
Government debt as a percentage of GDP: 76.1 per cent

Ireland
Government deficit: €22.9bn
Deficit as a proportion of GDP: 14.4 per cent
Government debt: €104.5bn
Government debt as a percentage of GDP: 65.5 per cent

Greece
Government deficit: €36.1bn
Deficit as a proportion of GDP: 15.4 per cent
Government debt: €288bn
Government debt as a percentage of GDP: 126.8 per cent

Spain
Government deficit: €117.3bn
Deficit as a proportion of GDP: 11.1 per cent
Government debt: €560.5bn
Government debt as a percentage of GDP: 53.2 per cent
EU limits under the now-defunct stability and growth pact

What Brussels recommends
An annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc)
A national debt lower than 60% of GDP or approaching that value.