Portugal’s economy might mimic Greece’s

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The same market maelstrom that engulfed Greece this week and forced it into the arms of the International Monetary Fund poses a serious threat to Portugal and other heavily indebted European nations.

Greece effectively was shut out of the debt markets by a downgrade into “junk” status by Standard & Poor’s Corp. on Tuesday, accelerating its downward spiral and making it increasingly likely that the country faces years of economic hardship as it imposes deep wage and budget cuts on protesting citizens while seeking relief from its burgeoning debts through a painful debt restructuring that will bring even more austerity.

But while Greece is now on track at least to get the benefit of low-cost loans from the European Union and IMF to ease the transition, similarly strapped countries such as Spain and Portugal may not be able to look forward to such generous assistance as resistance to burgeoning bailouts grows in the rest of Europe.

Analysts estimate that it would take a rescue fund of $650 billion or more to help the growing list of countries that are vulnerable to debt crisis in Europe, with Portugal at the top of that list.

But public opposition to any bailouts is fierce in the biggest contributor nation, Germany, where leaders have balked at providing even a small contribution of about $15 billion sought by Greece.

“Portugal is in a difficult situation,” said Diego Iscaro, an analyst at IHS Global Insight. “Although the deficit and debt levels are lower in Portugal than in Greece and the Portuguese government has much more fiscal credibility than its Greek counterpart, the underlying problems are very similar.”

Like Greece, Portugal is trying to slash a bloated deficit in the midst of an economic recession - a perilous task that threatens to worsen the downturn.

But it cannot use an escape valve used by other countries in financial distress - a drastic currency devaluation that would cushion the blow for the economy by boosting exports and tourism. The euro currency is controlled by the European Central Bank in Frankfurt, not by Athens or Lisbon authorities.

That leaves Greece, Portugal, Spain and Ireland, among other similarly stricken countries, in a morass where the government has few options to try to spur economic growth even as it is rapidly withdrawing government stimulus from the economy through drastic budget cuts.

Because of the similarities with Greece, Mr. Iscaro said Portugal is particularly vulnerable now to attacks by speculators in the bond market who are betting that it will be the next “domino” to succumb to financial pressures and be forced into a bailout or default on its debts. Events in the past week already have pushed the rates that Portugal pays on its 10-year bonds to the high levels it paid before joining the EU.

Portugal, which along with Spain also was downgraded by S&P; this week, is “susceptible to becoming the next victim of short sellers in the bond market,” Mr. Iscaro said.

However, “there are doubts about how the eurozone will respond if Portugal becomes the next victim. Germany’s government has made it clear that the safety net in place for Greece is a one-off, and there are questions about its political willingness to continue helping economies in distress.”

Germany and other European nations have said they want to set up a formal mechanism or European Monetary Fund to deal with such debt crises in the future, but that could be years away. In the meantime, the EU has no “clear or quick mechanism in place to deal with this type of crisis,” he said.

While traders known as “bond market vigilantes” appear to have set their sights on Portugal as the next possible victim of contagion from Greece’s debt crisis, other debt-laden European nations, such as Spain and Ireland, are not far from the firing lines, analysts said.

“It could be argued that Spain presents the most serious long-term risk to the eurozone, given that it accounts for some 11.5 percent of the region’s real total [economic output], as opposed to Greece’s share of 2.6 percent and Portugal’s 1.8 percent,” Mr. Iscaro said.

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