March 24, 2020 / By mobanmarket
Talks on Portugal’s bail-out deal were fraught, but finance ministers hope that they have done enough to stop contagion.Three down, how many more to go?
When EU finance ministers met near Budapest last week (8-9 April), a new concept entered the eurozone lexicon: ‘ring-fencing’. It was the buzzword of the two-day meeting, as politicians insisted that Portugal’s bail-out would be the last. Elena Salgado, finance minister of Spain – the country seen by many as the next potential casualty – said so on the way into the meeting on Friday morning, and just about everybody else said so afterwards.
Portugal fell into the same category as Ireland and Greece when, late on 6 April, José Sócrates, the caretaker prime minister, finally bowed to the inevitable and said that his country needed external aid.
Friday’s meeting largely consisted of working out what sort of conditions would be required before Portugal could get its hands on the money. According to the ring-fencing theory expounded in Hungary, now that this trio of countries has been quarantined, their diseased economies can be dealt with without any infection spreading to the rest of the eurozone.
“The dominant view from the markets is that this step ring-fences the three weaker economies in the eurozone and therefore hopes to avoid wider contagion,” was how Klaus Regling put it. He is the chief executive of the European Financial Stability Facility – the €440 billion fund set up in the wake of the Greek crisis last May. The idea was repeated so often that it seemed almost as if ministers and officials believed it would become a reality just by wishing it so.
Like any patient, Portugal must take its medicine. That much was agreed on Friday. And the pill could be bitter. Last month, the austerity package that Sócrates tried to get through parliament was too much for the opposition parties. They voted against it and Sócrates resigned. Yet this level of belt-tightening would be a mere “starting point” as a condition on loans of €80bn, according to the statement that the eurozone finance ministers released at the end of their meeting. There must be a sweeping privatisation programme too, a reform of the labour market, and tough spending cuts. It will be a very different Portugal when this is all over.
But successful treatment depends on Portugal agreeing to follow the prescriptions. The country will be without a government until 5 June. Eurozone officials want the bail-out deal wrapped up by then so that it can be formally agreed the next time finance ministers meet, on 16-17 May, in Brussels. This means not only introducing one of the most significant policies in Portugal’s recent history at a time when it does not have a government, but (mainly to overcome worries about the democratic legitimacy of this course) with the agreement of all main political parties. That will not be easy during what looks like becoming an acrimonious election campaign.
Barely before the ink had dried on the ministers’ statement, Fernando Teixeira dos Santos, Portugal’s finance minister, told reporters that it was “not for the government to negotiate with the opposition”. Meanwhile, news filtered through to Budapest that Aníbal Cavaco Silva, Portugal’s president, had said that the country needed an “interim” rescue deal so that a new government could be installed before any major decision was taken. That was out of the question, said Olli Rehn, the European commissioner for economic and monetary affairs, and what is more: “I would prefer not to have public dialogue every day with the leaders of Portugal.”
Ireland’s waiting game
Because discussions surrounding Portugal’s financial aid package dominated the meeting, there was little time for Michael Noonan, Ireland’s finance minister, to bring up his country’s demands for a one percentage point cut in the interest rate on its own bail-out loans.
“Today was Portugal’s day,” he said, when asked whether any progress had been made on his government’s request. “I’m new around here,” he added, admitting that he was still trying to understand how finance ministers’ meetings worked before attempting to win any concessions.
It was a clearly calculated approach that was in direct contrast to the less-than-successful tub-thumping performance of Enda Kenny, Ireland’s prime minister, at his first leaders’ summit last month. Noonan held separate meetings with the finance ministers of France and Germany, but said more talks would be needed before there could be any changes to Ireland’s rate.
Finance ministers agreed during their meeting that trading of commodity derivatives needed to be more closely monitored. France has led calls for tighter regulation in the face of rising prices for raw materials.
Ministers agreed that greater transparency on commodity markets was necessary, and they are expected to formally adopt their position at the next meeting of finance ministers, in Brussels on 16-17 May.
This undercurrent of discord characterised the meeting. At times it threatened to boil over into public recrimination. Anders Borg, Sweden’s finance minister, said that he was angry with Portugal’s government. “They have wasted a lot of time through this political gridlock and that has cost thousands of jobs in Portugal and thousands of jobs in Europe,” he said. Jyrki Katainen, his Finnish counterpart, was more diplomatic but no less insistent. Portugal’s leaders should have adopted a “tough package by themselves” months ago, he said, and the new set of austerity measures “must be tougher” than that which the government had already tried, and failed, to introduce.
This meeting, in the elegant surroundings of an 18th-century royal palace, was intended to give finance ministers the chance to look ahead through a discussion of economic governance rules, commodity-market regulation and the next International Monetary Fund (IMF), World Bank and G20 meetings. They discussed all of that, but the meeting, like so many recent precedents, was, once again, overtaken by fire-fighting.
As a delegation from the European Central Bank, European Commission and the IMF sets about examining Portugal’s books this week to assess the country’s exact needs, eurozone leaders will be hoping that Portugal’s bail-out does indeed signal the beginning of the end.
With the ring-fence in place, they hope that future meetings can be about considering how to prevent future crises rather than curing this one. But that will depend on how solid the fence is.
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