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Europe's debt contagion could spread from Ireland to Portugal — and then Spain.
LISBON, Portugal — “Well the NATO summit was a big success,” says the cartoon bartender in one of Portugal’s leading newspapers. “Now we can get back to the crisis as usual.”
The gathering of world leaders for NATO’s summit was a brief distraction for the Portuguese, as the country struggles to avoid becoming the next domino to fall in Europe’s spreading debt crisis.
Many in Portugal were hoping Ireland’s request Sunday for a bailout from European Union and International Monetary Fund (IMF), expected to top $100 billion, would have given some breathing space to other eurozone nations laboring to reassure international bond markets that they can pay their debts.
But unlike the respite that came after the EU-IMF rescue of Greece back in May, the Irish deal has brought little relief.
On Tuesday, the Lisbon stock exchange suffered its biggest fall since August. The bond market pushed up the interest rate that the Portuguese government has to pay on its 10-year bonds to 7.2 percent today — compared to the 2.57 percent that Germany pays. Portugal’s finance minister has said the government will have to consider pleading for IMF and EU help if the rate goes above 7 percent.
“I don’t think anybody will be surprised if there’s a request for help,” said Eva Gaspar, a journalist with the business daily Jornal de Negocios. “This is all very complicated, there’s no relief from the pressure.”
The next few days could be crucial in deciding Portugal’s fate.
On Friday, the government will present its 2011 budget to parliament. It aims to cut the country’s deficit to 4.6 percent of GDP from the 7.3 percent forecast for this year.
The minority Socialist government headed by Prime Minister Jose Socrates has struck a deal with the main center-right opposition party to secure passage of the budget, but many are concerned that the planned rise in sales tax and cuts in the public-sector wage bill will not be enough to offset mounting spending on unemployment benefits and interest payments on a debt that has risen to 76 percent of GDP.
Two days before the budget vote, the country’s two main labor unions united to call a general strike for the first time in more than 20 years. The walkout paralyzed airports, public transport networks and trash collection, and left schools and banks closed, underlining the strength of public unhappiness with the government’s austerity measures.
“There is deep discontent with the high level of unemployment, and we know that the politicians are bringing down the living standards and working conditions of Portuguese workers,” said Joao Proenca, general secretary of the UGT union, which has traditionally been close to the governing Socialist Party.
Although the unions have mass support, the Portuguese have a tradition of non-violent protest and Lisbon is unlikely to suffer a repeat of the riots that left three dead in Athens six months ago. Instead the long-suffering Portuguese seem resigned to more hard times ahead. Unlike the Greeks and Irish, who crashed from boom to bust, Portugal’s economy was only just beginning to drag itself out of a prolonged slump when the global crisis knocked it back down in 2008.
“When you speak to a taxi driver or walk into a cafe, you hear people talking about the level of public debt or rate of interest on bonds — the crisis is the only topic of conversation,” said Gaspar, a well-known commentator on economic affairs. “The hairdresser this morning was complaining that the country’s being sold off and we’re worse than Greeks.”
Despite the gripes, the Portuguese won’t get the opportunity to vote the government out as the Irish seem set to do early next year. Portugal is holding presidential elections on Jan. 23, and although the head of state’s role is largely ceremonial, the constitution states that parliamentary elections cannot be held within 90 days before or after the presidential poll.
The Portuguese situation has sparked concern throughout Europe because if Portugal does follow Ireland and Greece by requesting an EU-IMF rescue, the contagion could then spread across the border to Spain. The Spanish economy is three times bigger than those of Ireland and Portugal combined and some economists fear that a rescue package for Spain could put eurozone finances under unbearable strain.
Those fears haunted the corridors at the NATO summit last weekend. U.S. President Barack Obama talked up Portugal’s “vigorous” efforts to put the economy back on track, but the mood was grim. One eastern European diplomat said her president had given tips to his Portuguese counterpart about his country’s drastic belt-tightening measures, which included salary cuts and mass layoffs of public officials in the face of a near economic collapse in 2008.
“Everybody is so scared that it’s going to happen again, a double dip,” the official said. “I don’t know what we’ll do if it does, we just don’t have anything more to cut.”