House of cards: Portugal is latest domino to fall, others will follow

July 6, 2011 – LISBON – There is a growing sense of despair in Brussels. Unlike previous attacks on the euro project, the latest downgrade of Portugal’s debt by the ratings agency Moody’s feels like the beginning of the end. Those economists and fund managers who argued that a second bailout for Greece with private sector involvement would mean something similar for Portugal and most likely Ireland are hitting their target. Like a 19th century battalion holding the line against oncoming hoards with depleted firepower and an officer class at war with itself, the euro’s supporters are in a desperate situation. Since last year’s Greek debacle, European leaders have sought to provide lifelines to the worst hit countries by replacing the private debt markets with the European Central Bank. The ECB now holds almost £100bn of Greek debt. Portugal was in much the same position, but hoped to muddle through its crisis with just one bailout from Brussels. Moody’s says it is likely to join Greece in a second bailout because, like with Greece, private lenders are going to stay away for longer than expected. Investors ask why they should buy the bonds issued by a country that will be forced to change the terms for the worse mid way through the life of the loan. That is what Brussels is contemplating for Greece. Moody’s naturally assumes the same will be imposed on Lisbon. Just as we found in the worst period of the banking crisis, attempts by politicians to save money and preserve asset values only make the situation worse. The UK government was urged to nationalize the worst hit banks almost as soon as Northern Rock collapsed, but did everything it could to avoid recognizing the problem and when it did, it tried mergers and loans coupled with austerity to minimize the effect on the state. Lloyds was encouraged to merge with Halifax and when that failed it was told to use an injection of government cash, to be repaid, as a way to slim down. Now Lloyds, like most of our banks, are zombie institutions unable to help the UK economy get back on its feet. The same recipe is being lined up for Greece and soon for Portugal. Moody’s recognizes this unpalatable fact and says it fears “Portugal will not achieve the deficit reduction target – to 3% by 2013 from 9.1% last year as projected in the EU-IMF program – due to the formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.” –Guardian        

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