The Next Chapter in European Debt Crisis: A Portugal Bailout?

Portugal's government collapsed on Wednesday after austerity measures were rejected

This article is from the archive of our partner .

The European Union has already bailed out Greece and Ireland. Now, after Portuguese Prime Minister Jose Socrates offered his resignation on Wednesday following parliament's rejection of his deficit- and debt-reduction plan, many fear Portugal could be next.

As Portugal's borrowing costs soar to what many analysts regard as unsustainable levels, European officials are suggesting that a bailout could cost anywhere from $99 billion to $113 billion. To put those numbers in context, the Greece bailout cost European countries and the International Monetary Fund $146 billion, and the Ireland bailout $90 billion.

Portugal has not yet asked for a bailout, and it's not entirely clear the country would accept one. The broader implications of Portugal's predicament for the European debt crisis are subject to debate, as well. Here are the basics, below.


How would a bailout help Portugal? Belgian Finance Minister Didier Reynders explained on Thursday that the money would allow Portugal to pay less interest on its debt while the government gets its fiscal house in order per the terms of the loan.

Despite these benefits, Portuguese cabinet minister Pedro Silva Pereira insisted on Thursday that the government maintained Socrates' opposition to foreign aid, arguing that a bailout could hurt Portugal's economy. "Portugal has bad memories of IMF-ordered austerity in the 1980s," Reuters explains, but the country's opposition parties, who voted against Socrates' austerity plan, haven't ruled out accepting a loan.


European countries like Germany argue that a Portuguese bailout would remove a source of instability in the euro zone, Reuters notes.

But a European official tells Dow Jones that while Europe has the money to bail out Portugal, things could get dicey if the markets subsequently sour on a larger, troubled economy like Spain's, forcing Spain to request a loan. "Any such bailout will need to be very big," he said. On Thursday, Spanish financial markets remained strong, suggesting that investors have confidence in the Spanish government's economic reforms.

Time's Michael Schuman contends that European countres are addressing the debt crisis in the wrong way. In their summit this week, he explains, Europe's leaders plan to establish new rules that would fine countries that fail to meet guidelines on budget deficits and sovereign debt levels. "Making the weaker economies of Europe stronger is exactly the way to fix the euro zone and end the euro crisis," Schuman says. "Doing so by beating the struggling nations with sticks isn't the way to do it. Politicians [in weaker economies] will end up resisting to keep their jobs. Wouldn't you?"

This article is from the archive of our partner The Wire.