Portugal: The next chapter
The Portuguese government almost certainly has the ECB to thank for being able to borrow 10 year debt from the markets this morning at an interest rate of around 6.7%.
But even with this auction, most now consider it a question of when, not if, Lisbon will join the list of eurozone governments turning to Europe and the IMF for emergency support.
Today's much anticipated auction will come as a relief. But Portugal's government needs to borrow around 20bn euros from the markets this year - a big chunk of it in the first few months. It is not plausible to anyone that they will finance that debt at an interest rate even close to 7%.
By my (very rough) reckoning, its long-term cost of borrowing needs to move below 6%, for it to have a chance of stabilising the stock of government debt relative to GDP within the next few years.
You might wonder what the fuss is all about. Like Greece and Ireland, Portugal represents a tiny fraction of the eurozone economy, and the eurozone bailout facility - the EFSF - has plenty of money in the kitty to back a joint IMF-European support programme that could keep Portugal from needing to return to the markets for a few years. The figures mentioned have been in the region of 50bn euros.
As I said on the Today programme this morning, European policy makers - and investors - worry about a Portuguese bailout, not because of any inherent concern for that country, but for what it symbolises - and for what might happen next.
The key point is that Portugal is not an outlier. Its government has borrowed more than it should, and delayed a bit too long in getting on top of that borrowing. The upcoming election is producing some unhelpful mood music on that subject. But even a year ago, you would not have said that its fiscal position was inherently unsustainable. It is not Greece.
Yes, Portugal's banks are being kept afloat by the ECB (like Ireland's have been in the past year). But they do not have a mountain of bad private debt sitting on their balance sheets. It is not Ireland.
As Robert Peston has described in the past, Portuguese banks would need to be re-capitalised as part of any bailout. But they have been made weak by lack of confidence in government debt: the contamination runs from the sovereign to the banks. This is not an Irish situation, where toxic private sector assets have contaminated the balance sheet of the government via a sweeping sovereign guarantee.
No, Portugal's problem is that whatever issues it has with its banks and its public borrowing are being greatly magnified by the country's weak prospects for growth.
The consensus forecast is for the Portuguese economy to shrink slightly in 2011, after very meagre growth in 2010. By contrast, Germany is expected to grow by at least 2.5% in 2011, after growth of around 3.6% in 2010.
If the Portuguese had that kind of recovery to look forward to, the world would have been a lot less interested in the results of today's auction. And investors would not be placing their bets now on a pre-emptive show of support for Portugal's much larger neighbour, Spain.
It would be easier for everyone if Portugal looked just like Greece - or Ireland. But it doesn't. Arguably, it has more in common with other countries on Europe's periphery that are being held back by a lack of confidence in future growth. If the markets are right, a Lisbon bailout is a matter of time. But after Portugal, it becomes more difficult to draw a line in the sand.