Europe Fears That Debt Crisis Is Ready to Spread
Peter Morrison/Associated Press
A newspaper vendor in Dublin on Monday.
LONDON — European officials, increasingly concerned that the Continent’s debt crisis will spread, are warning that any new rescue plans may need to cover Portugal as well as Ireland to contain the problem they tried to resolve six months ago.
Crispin Rodwell/Bloomberg News
Ireland's finance minister, Brian Lenihan, expressed confidence.
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While some important details are different, the current situation feels eerily similar to what happened months ago in Greece, where the cost of borrowing rose precipitously.
European authorities stepped in with a rescue package, expecting an economic recovery and the creation of new European rescue funds to fend off future panics by bond investors whose money is needed by countries to refinance their debt.
But with economic conditions weakening, markets are once again in turmoil. Rescuing Ireland may no longer be enough.
Stronger countries and weaker countries using the common currency of the euro are being pulled in different directions.
Some economists wonder if unity will hold or if some new system that allows countries to move on one of two parallel financial tracks is needed.
Despite the insistence of Irish officials that only its banks need additional help, investors continue to bet on an Irish rescue, driving down the bond yields on that country’s debt against a benchmark again on Monday.
Portugal’s yields increased to 6.7 percent, underscoring the emerging concern in Brussels, the administrative center of the European Union, that it would be irresponsible to adopt a plan to prop up Ireland without addressing the possibility that turmoil could ultimately engulf Portugal, or even Spain. Like Ireland, Portugal has struggled to grow under the fixed currency regime of the euro. Though Portugal has raised enough funds of late from bond markets, its budget deficit is 9 percent of its gross domestic product, much higher than the 3 percent limit for countries in the euro zone. With its weak government and slow growth, investors have grown fearful that Portugal, too, will eventually run out of funds.
While Ireland has largely impressed European officials with its commitment to austerity, Portugal has been lagging in this regard, according to European officials. One official in Europe, who asked for anonymity because he was not authorized to speak publicly, said that the budget recently presented by the government in Lisbon did not contain the type of far-reaching changes proposed by other countries, like Spain.
“If Ireland were to ask for aid, then you’d have to look at what’s going on in Portugal as well,” the official said, putting forward a view rescuing Ireland alone would not keep speculators from other vulnerable countries.
José Manuel Barroso, president of the European Commission, said on Monday that Ireland had not requested aid. “We have all the instruments to address the problems that may come either in the euro area or outside the euro area,” he told reporters in Brussels.
The Portuguese finance minister, Fernando Teixeira dos Santos, said Monday evening in Brussels that the situation in Ireland was creating dangers for all countries using the euro.
“If things are getting worse in Ireland, for instance, that will have a contagion impact on the other euro zone economies and particularly on those that are under closer scrutiny of markets, like Portugal,” he said. Asked if Ireland should accept a bailout to stem the contagion, Mr. Teixeira dos Santos said, “It’s not up to me to make that assessment.”
Even so, Mr. Teixeira dos Santos emphasized that his country was not preparing to ask for a rescue package.
Mr. Teixeira dos Santos also said his government was preparing a robust budget that would cut wages, freeze pensions and raise taxes. “We are really committed to meet our targets,” he said. “I think we deserve that the market gives us the chance to show that.”
The bureaucratic machinations in Brussels highlight one of the main concerns that grew out of the establishment earlier this year of a rescue fund of 500 billion euros (about $680 billion at today’s exchange rate) by the European Union after the Greek budget crisis: What happens if, in the next crisis, multiple countries need aid at the same time?
Months later, it remains unclear how, in practice, countries like Ireland and Portugal would tap the rescue money.
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