Europe News

Will Portugal and Ireland Follow Greece on the Brink? 

With the world’s markets focused on the no-confidence vote in Athens Tuesday evening, one of the big questions facing the investors is if Portugal and Ireland could fall into similar difficulties if dreaded contagion where to spread across Europe’s periphery.

Protester throws a stone during demonstration at anti-austerity rally.

“The Irish and Portuguese public finances are not in as precarious a position as those of Greece, but we think that there is a strong chance that both economies will eventually have to follow in Greece’s footsteps and try to persuade private sector creditors to roll over their debt as part of a new bail-out,” said Ben May, the European economist at Capital Economics in a research note before the Greek vote.

“The likelihood of some form of debt rollover in Greece begs the question of whether similar arrangements will follow in Ireland and Portugal. After all, less than a year after Greece gained its first bail-out from the EU and IMF, Ireland and Portugal were forced to request help too,” May added.

With neither the Irish nor the Portuguese under pressure to negotiate more support from the European Union and the International Monetary Fund, May believes both governments have time but the question whether they will they eventually have to follow the Greek example again remains.

“On the face of it, then, this gives both governments at least another 18 months to persuade the markets that they can get their public finances on a stable footing without defaulting,” he wrote.

“But if Irish and Portuguese long-term bond yields remained well above 6 percent or so next summer, concerns of a funding crisis in 2013 would inevitably start to grow and would probably result in both Governments coming under pressure to accept a second bail-out package well before 2013,” said May.

With no chance of either country running a budget surplus next year, May believes the budget deficit in both countries could actually keep going up.

“In all, we think that both countries may eventually follow in Greece’s path and have to seek a second bail-out package. Given the unpopularity of bail-outs among core voters, policymakers are likely to demand that the private sector shares some of the burden too,” he said.

“And if our pessimistic growth forecasts turn out to be correct, there is a risk that this is eventually followed by a more significant default,” May added.