Business

Europe's bad debt 'dominoes'?

  • 1 December 2010
  • From the section Business

Despite the continuing denials of the Portuguese government, concerns are growing that Portugal will be the next country that requires a European Union-led bail-out.

BBC business editor Robert Peston says the country's debt levels are such that Portuguese officials have told him it is now "not a question of if there will be a bail-out, but when".

But how do Portugal's finances compare with the Irish Republic's, and those of other nations struggling with excessive public debt?

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While Portugal's budget deficit is lower than the Irish Republic's, its overall debt levels are higher.

And BBC business editor Robert Peston says the situation in Portugal is more precarious, because its banks have been lending billions of euros from the European Central Bank to the Portuguese government.

This is an unsustainable position, and as Lisbon will need to raise billions of euros in alternative funds, these are likely to have to come via a European Union-led bail-out.

Despite Portugal's economy expanding by 0.4% between July and September, its government says its high unemployment rate (11% at the latest count) limits its scope to trim public spending.

Portugal's economy is also continuing to be affected by the high value of the euro.

This has hit its tourism industry, where the strong euro is putting off British holidaymakers.

Portugal's manufacturing sector has also been hit hard over the past decade by the big growth of China.

The country has traditionally been a big producer of clothing, especially footwear, competing well against other European Union nations because of its - by comparison - relatively low wages.

But China and other Asian nations have pushed Portugal to one side, because they can produce more shoes and clothing items at even cheaper prices.

The Irish government is continuing the process of securing emergency loans from the European Union and the IMF.

How did it get itself into this situation?

Its economy is in a mess following a dramatic collapse in its housing market that left banks with vast bad debts.

This resulted in the government having to bail out the lenders at a cost of 45bn euros.

Such a move put huge pressure on the government's already struggling finances, and it is now expected to run a budget deficit equivalent to 32% of GDP this year.

Dublin is now due to announce major spending cuts later this week, as it seeks to reduce this deficit.

Greece's very public debt woes of earlier this year should have been resolved after it was granted a 110bn euros ($149bn; £93bn) bail-out in May.

This money is being provided over three years by the EU and the International Monetary Fund, and in return Greece is continuing with a range of austerity measures to reduce its budget deficit and raise taxes.

However, some are continuing to ask whether Greece has been able to stick to the agreement.

Josef Proll, Austria's Finance Minister, said recently that Athens had failed to meet targets to increase its tax revenues, adding that he was "very critical" of the behaviour of the Greek government.

The situation is raising concerns that Greece will need more bail-out funds.

Like the Irish Republic, a collapse in the housing market has also been a key factor in Spain's economic woes.

Yet the country's economic problems run a lot deeper, as Spain's 20.8% unemployment rate reveals.

The country is now continuing to liberalise its labour laws to make it easier for firms to make people redundant.

This may sound as if it will worsen the problem, but Madrid hopes the increased flexibility will persuade more companies to take on extra staff.

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