Portugal: strike three for the eurozone?

Overshadowed for weeks by violence in the Middle East and the tragic earthquake and tsunami in Japan, the European debt crisis is again front and center. It now appears inevitable that Portugal will become the third European country to require emergency funding to bail out its national economy.

The strongest signal of Portugal’s insolvency came Wednesday, when the country’s prime minister unexpectedly resigned. Jose Socrates stepped down after failing to convince the Portuguese parliament to approve an austerity plan aimed at preventing default on its debt.

By refusing to address these fundamental issues, Portugal’s legislators have set the country on a course with only one possible outcome: European Union intervention. In order to protect the integrity of the eurozone and the value of the euro, the European Union (EU) has no choice but to provide Portugal with emergency funding. However, as Greece and Ireland can attest, this largesse comes with hefty strings attached – not the least of which is the loss of sovereignty and control of the nation’s finances.

Portugal’s situation will surely become even more precarious in April, when the next round of its government bonds matures. At a time when the nation is broke and the government is effectively suspended, Portugal faces €9 billion ($12.7 billion) in redemptions due in April and June.

Below the iceberg

In 2010, the EU and the International Monetary Fund (IMF) provided a total of €180 billion to prop up Greece and Ireland. Early estimates place the total amount needed to rescue Portugal at €70 billion. Unfortunately, this may not mark the end of the debt crisis as several other European countries remain at risk.

Spain – to put it bluntly – is a financial basket case. Unemployment exceeds 20 percent, buoyed by a generous system that pays unemployed workers 65 percent of the average national earnings for up to two years if they’ve worked for six years. The country’s unsold housing inventory is six times worse than in the United States, with some 1.6 million unsold properties. Spain’s deficit equals 11.4 percent of gross domestic product (GDP) and its government debt alone equals nearly 60 percent of total GDP. With several credit downgrades by Fitch and Standard & Poor’s, it has become even more expensive for Spain to finance its debt at a time when it simply cannot afford to pay more interest.

With Spain’s economy making up roughly one-tenth of the eurozone, its insolvency could cause immense damage to the entire region. By way of comparison, the combined economies of Greece, Ireland, and Portugal equal barely half of Spain’s total value. Using the earlier rescue packages as a guide, it is not out of line to estimate that should Spain require emergency funds, the amount could easily be a quarter of a trillion.

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