As the country that supplied the P in the acronym PIGS, Portugal has long had reason to be worried about investor sentiment. Now with the Greek crisis taking a new and unpleasant turn, there is an obvious danger that speculation about whether Portugal will be next risks becoming a self-fulfilling prophecy.
The Portuguese have some solid points to make about why their problems are less severe than those of Greece. Their budget deficit is smaller as a percentage of GDP – its just under 10% in Portugal, whereas the Greek deficit is 12.7%. Portugal’s overall debt burden is well below 100% of GDP; Greece broke that particular milestone long ago. The Portuguese have been making good faith efforts to cut public spending for at least five years.
All true. But if market sentiment turns, it could also all be irrelevant. The current mood in Europe reminds me of the ERM crisis of 1992, when contagion spread from one country to another. Read more