As Greece Nears a Big Debt Deal, Investors know Portugal is next

Despite the best efforts of European politicians to place a quarantine fence around the Greek economy, the crisis there continues to plague Portugal.

The authorities in Lisbon insist otherwise, but investors are predicting that Portugal will be next in line to impose losses on bondholders as it struggles to meet the terms of a 78 billion-euro, or $103 billion, bailout agreement struck with international creditors last May.

While a short-term debt auction on Wednesday went off comfortably, Portugal’s long-term borrowing costs remain unsustainably high, and spending cuts that are cleaning up public finances are also helping to plunge Portugal into one of the deepest recessions in the Western world. Its economy is predicted to contract 3 percent this year, and the unemployment rate, at 13.6 percent, is one of the highest in the euro zone.

Whatever deal with creditors is reached in Athens in the coming days, “it’s most likely that Portugal will say that it wants one of those, too,” said Edward Hugh, an economist in Barcelona who has been tracking the euro zone’s debt crisis. Portugal “literally has nothing further to lose, except some of its debt burden,” he said.

Lisbon’s center-right coalition government, which came into power last June, insists that it needs more time rather than more money. Prime Minister Pedro Passos Coelho said on Tuesday that Portugal would comply with the agreement reached last May, “whatever the cost.”

The International Monetary Fund , alongside other creditors involved in the debt repayment negotiations in Athens, also emphasizes that Greece need not set a precedent for other ailing economies like Portugal.

“It’s going to be hard for Portugal, but we’re talking about different numbers, and Portugal’s tax collection system is much more effective,” said Albert Jaeger, who heads the I.M.F.’s office in Lisbon. He added: “The most important advantage that Portugal has is probably its internal political and social consensus.”

Domestic discord continues to be one of the main stumbling blocks in Athens, with Prime Minister Lucas D. Papademos struggling to secure backing from the three parties in his shaky coalition — particularly over private sector wage cuts — before signing a deal with creditors that will also require majority approval from Parliament. Mr. Papademos is set to meet with the party leaders Thursday to work out an agreement that could be discussed at a meeting of European finance ministers in Brussels on Monday.


CNBC