Belfast Telegraph

Wednesday 20 August 2014

Portugal facing financial collapse

Portugal's financial collapse appears inevitable in the wake of Prime Minister Jose Socrates' resignation (AP)

Portugal's financial collapse appears inevitable as markets took the government's resignation as proof the debt-heavy country will lose its year-long battle to avoid an international bailout.

Investors pushed the interest rate on Portugal's 10-year bonds to a euro-era record of 7.71% - a level that is unsustainable and could force the country to ask for a rescue like Greece and Ireland did last year.

The government quit late on Wednesday after opposition parties rejected its latest debt-reduction plan, generating a new bout of market jitters over the country's future.

It is unclear how soon Portugal could take a bailout, as experts believe it is unlikely that an interim government will have the constitutional authority to accept a bailout on the country's behalf. Elections would not be possible before the end of May, leaving months of unwelcome - and costly - uncertainty ahead.

The upheaval in Portugal was a setback for European leaders who are trying to reassure markets about the soundness of the 17-nation eurozone.

A European Union summit in Brussels will seek to finalise measures aimed at finally drawing a line under the sovereign debt crisis that has dogged the continent for more than a year.

Debt problems also brought down Ireland's government earlier this year after it took a bailout, forcing an election that was won by the main opposition party.

German Chancellor Angela Merkel, who has pushed her European partners to be more prudent in spending and change their economies with the times, said that "a consistent path of consolidation and reform is essential."

Portugal's borrowing costs have risen steadily over the past year as investors demand a high return for the risk of granting loans to a country viewed as risky because of its high debts and low growth.

The government has fought to avoid asking its EU partners and the International Monetary Fund for a bailout because the package comes with fiscal conditions that limit a country's ability to set policy and decide its own fate. It is unclear whether a bailout, should one be needed, could be negotiated by a caretaker government.

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