The smart money seems to be on a deal worth around 80bn Euros in total, provided on roughly the same terms as in the case of Ireland. So a third would come from the IMF, a third from the European Financial Stabilisation Mechanism and a third from European Financial Stability Facility. Try saying that after a few shots of Ginja.
Since the UK has ‘exposure’ to both the IMF (to which it contributes around 4.5% of total funds) and the EFSM (13.5%), although not the EFSF, that means that it will cost us around £4.2bn to save the Portuguese economy. Even though, of course, we aren’t in Eurozone. This has resulted in a good deal of political outrage here in Blighty - not all of it manufactured in pursuit of headlines - at the iniquity of it all.
Of course on one level it is not remotely ‘fair’ that the UK should have to dip into its already very tightly constricted pockets to save yet another Euro economy, when we’ve got enough to do keeping our own on an even keel. (Although that £4.2bn is in loan guarantees not hard cash, so we’ll only actually have to spend it should Portugal default).
But such a narrow view of the subject neglects the fact that it is very definitely in our national interests to keep the Eurozone countries together and solvent. Collectively they are our biggest trading partners after all. And although the demise of Portugal was not exactly a surprise to anyone, there are signs that the cracks are showing.
The French and the Germans are doing their usual job of trying to hold the whole thing together with diplomacy and persuasion, but across the rest if the Eurozone there is what might politely be termed a ‘considerable diversity’ of opinion. The difficulty will lie in reaching agreement on exactly how austere the austerity measures imposed on the Lisbon government in return for aid should be. France’s finance minister Christine Lagarde has spoken emolliently of providing ‘encouragement and support’ to countries in financial difficulties. But Finland’s Jyrki Katainen was rather more direct, saying that ‘the package must be very strict… we have to do what we have to do.’
Whatever happens, the Portuguese can look forward (if that’s the expression) to a lot of expert financial delegations jetting in to wag their collective fingers and suck their teeth over the state of the national finances. But the bigger question remains what the impact will be on the Eurozone as a whole. As things stand at present it’s a clash of political will versus economic reality - and while that political will remains strong the irresistible force will fail to shift the immovable object. But should that will falter - should yet another, much larger economy like Spain for example, fail - then the Eurozone’s more robust nations might need a plan B.
There is potential evidence that such an escape vehicle is already being prepared: the ECB’s raising of interest rates this week will have a serious negative effect on growth in the peripheral economies of the Eurozone, whether it does anything to slow inflation or not. And the greater the disparities between the constituent countries, the easier it will become to argue for some kind of break up. Interesting times…