Trouble repaying your debt? Here, borrow some more: how about €80bn? That sums up the eurozone’s response to its sovereign debt crisis. Portugal on Wednesday became the third eurozone country to ask for financial assistance: it needs about €75bn. After €110bn for Greece and €68bn for Ireland, the eurozone’s three most indebted countries have swelled their debt burden by another €250bn. Who thinks that is sustainable? German taxpayers don’t. Neither do investors.
Portugal’s bail-out request was probably triggered by next week’s €4.5bn bond issue redemption. The country borrowed €1bn of one-year money on Wednesday at nearly 6 per cent (Germany can borrow one-year money at 1.3 per cent); five-year money costs 10 per cent. Only a country with a roaring economy can afford those rates. Sadly, Portugal’s economy is the most sluggish in the eurozone – it grew only 1.1 per cent a year between 2001 and 2007. Years of fiscal adjustment and structural reform now lie ahead.
Investors outside Europe can take comfort that Spain appears to have regained the market’s confidence. But eurozone policymakers should ask themselves: can Greece, Ireland and Portugal do everything expected of them and pay back every cent of their borrowings on schedule? Recession, onerous interest payment schedules, and severe fiscal adjustment measures can quickly make debt levels unsustainable. Greece, Ireland and Portugal are approaching that position. Portugal already has public debt of 92 per cent of gross domestic product. Its bail-out package is likely to be equivalent to 50 per cent of GDP.