Portugal

Political junkies throughout Europe will, for one weekend at least, take their eyes away from the ongoing turbulence in Portugal and shift 3,500km to the northeast, where Finnish voters go to the polls on Sunday in what has become one of the most interesting national elections since the outbreak of the eurozone crisis.

As we’ve chronicled in the FT for several months, the once safely pro-EU Scandinavian country has seen an incredible surge in support for the populist True Finns party, which has run on an avowedly anti-euro and “no more bail-outs” platform. A victory for the party, led by MEP Timo Soini, could throw a huge wrench into EU efforts to rescue Portugal.

The final opinion poll going into Sunday’s vote shows True Finns support slipping a bit, however. Last month, a TNS Gallup poll put them in second place at 18.3 per cent, just 2 percentage points behind the front-running centre-right National Coalition party. The latest TNS Gallup survey had them at just 16.9 per cent, however, and a survey issued Thursday by public broadcaster YLE put Soini back in fourth with just 15.4 per cent. 

Portugal will be asked to implement sweeping austerity measures and conduct a major privatisation programme when negotiations begin next week to hammer out a likely €80bn bailout package with the European Union and International Monetary Fund. 

Another eurozone country has been humbled by its banks. Earlier this week, Portugal’s banks were threatening a bond-buyers’ go-slow unless the caretaker government sought financial help from other European Union countries. After being beaten up in Wednesday’s debt auction, Lisbon has waved the white flag. The country’s caretaker leaders have now admitted that Portugal will need outside help. 

With most of the work on the so-called “grand bargain” completed at last week’s European Union summit, all eyes will now focus on Portugal and whether it can make it until expected elections in May or June without resorting to a bail-out.

A new research note by Giles Moec, the head of European economic research at Deutsche Bank, nicely encapsulates the stakes facing Lisbon and summarises much of what we were hearing on the sidelines of last week’s summit – namely, that it would be in Portugal’s interest to take a bail-out, but the political turmoil may make it impossible.

As Moec notes, the date to watch is April 15, when the Portuguese government has about €4.3bn in outstanding debt it must refinance. With Portugal’s 10-year bonds hitting another euro-era high of 7.9 per cent on Monday – well above the 7 per cent the government has said it can handle – that April deadline is looking rather expensive. 

Portugal’s prime minister has resigned on the eve of a European Union summit that is supposed to move towards a “grand bargain” to bolster the eurozone and strengthen its crisis prevention ability. The currency bloc is in a bind. Lex’s Edward Hadas and Vincent Boland discuss just how bad it is and what might come next. 

The Liberal Democrats chose the elegant Palais D’Egmont for their pre-summit gathering. While the leafy grounds are gorgeous – particularly on a very un-Belgian sunny day – the mood was anxious. 

Until Portugal imploded, most of the focus of the two-day summit was expexted to be on the new Irish prime minister Enda Kenny, who failed to secure a cut in Dublin’s bail-out loans during an emegency gathering two weeks ago. 

The pre-summit caucuses of leaders in their party groupings have begun, and one of the surprise guests at the centre-right European Peoples’ Party meeting is Pedro Passos Coelho, the head of Portugal’s opposition Social Democrats and the country’s likely next prime minister. 

The euro has fallen by almost 20 per cent against the dollar since last November, and the general view in Europe is that this is good news – indeed, one of the few pieces of good economic news to have come Europe’s way recently.  The argument goes as follows: euro weakness = more European exports = higher European economic growth.

Unfortunately, the real world is not as simple as that.  Inside the 16-nation eurozone, not every country benefits equally from the euro’s decline on foreign exchange markets.  As Carsten Brzeski of ING bank explains, what matters is not so much bilateral exchange rates as real effective exchange rates.  These take into account relative price developments and trade patterns, and their message for the eurozone is far from reassuring. 

For anyone wondering why Europe’s leaders are so determined to avoid a restructuring of Greek sovereign debt, I recommend a remarkable piece of research published on Monday by Jacques Cailloux, the Royal Bank of Scotland’s chief European economist, and his colleagues.  (Unfortunately, it seems not to be easily available on the internet, so I’m providing links to news stories that refer to the report.)

The RBS economists estimate that the total amount of debt issued by public and private sector institutions in Greece, Portugal and Spain that is held by financial institutions outside these three countries is roughly €2,000bn.  This is a staggeringly large figure, equivalent to about 22 per cent of the eurozone’s gross domestic product.  It is far higher than previous published estimates.  It indicates that, if a Greek or Portuguese or Spanish debt default were allowed to take place, the global financial system could suffer terrible damage.