For a moment yesterday morning, it looked as if the announcement of a bail-out for Ireland had impressed the markets: share prices began rising, the euro strengthened and government bond yields eased. Sadly, the respite proved strictly short-lived: by lunchtime, all three trends had reversed. No wonder. Those in Brussels who bullied the Irish into accepting a rescue they would not have needed, had Germany not stoked up this crisis with its calls three weeks ago for a new financial restructuring deal, have added error on error. Rather than drawing a line under the crisis, the bail-out of Ireland will make it tougher to prevent a disastrous domino effect.
José Socrates, the Portuguese Prime Minister, toured the television studios yesterday, insisting his country does not need a bail-out. His arguments are logical: Portugal’s banks are better funded than those of Ireland, its property sector less bombed-out and its public finances more secure.
To which the markets’ reaction can be broadly characterised as “so what?” Portugal’s efforts to bring its deficit down have yet to convince those who buy and sell its debts. And with a major fund-raising exercise due next April, it is running out of time to secure the markets’ confidence. Its bond yields remain sky-high and money continues to flow out of the country. By accepting that the markets’ demands for assistance for Ireland made a bail-out inevitable, the EU has condemned Portugal to the same fate. There may be no obvious trigger – though January’s public finance data may show Portugal has missed its 2010 target for deficit reduction – but nor was there for Ireland. Greece and Ireland dealt with, Portugal is simply the next target. Then it is the big one: Spain. And while the first three are manageable rescues for the EU, Spain is not. The rescue facility set up by the European Union is not of sufficient scale to deal with a Spanish crisis. Its sovereign debt, for the record, totals around €560bn (£478bn), around €30bn more than Greece, Ireland and Portugal combined.