Portugal was not at the centre of the summit discussions that European Union leaders held. But it is a dossier they dare not leave untouched for long. If Europe is to banish the spectre of Greek-inspired contagion from its sovereign debt crisis, it may need to address Portugal’s plight within weeks rather than months.
The yield on 10-year Portuguese government bonds soared above 17 per cent, a record for the euro era. It is all but inconceivable that Portugal will regain access to debt markets in 2013, as foreseen under its €78 billion EU-International Monetary Fund rescue agreed last May.
The brutal truth is that financial markets are pricing in a Portuguese default at some point in the next five years. They predicted the same fate for Greece last year, having concluded that a €110 billion EU-IMF aid plan, arranged in May 2010, was insufficient to extract Greece from its debt trap.
For at least six months, however, European governments have assured private investors that the only country in the 17-nation eurozone on whose bonds they will be asked to accept a loss is Greece. Their “haircut” will be no mere snip and trim. It may amount to 70 per cent of the long-term value of their investments in Greek debt. Still, it is a deal that will, in principle, lift rather than depress the survival chances of Europe’s monetary union.
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