6:02pm

Wed April 6, 2011
Planet Money

Portugal Finally Admits It Needs A Bailout

Everybody except Portugal knew this was coming: Portugal needs a bailout from the European Union.

A few weeks back, Portugal's legislature rejected new austerity measures. The prime minister, who supported the measures said he'd resign. The interest rate the country had to pay to borrow money shot up. Finally, this afternoon, the government said it would ask for a bailout.

But all that was just the last straw. It's been pretty clear for a year now that Greece, Ireland and Portugal would all need bailouts. As of today, that's come to pass.

These are all small countries with small economies. The EU can bail them out and still be in decent fiscal shape. Portugal's bailout is likely to cost somewhere around $100 billion, according to the AP. That's not trivial, but it's not enough to take down the EU.

The big worry all along — and the big worry still — is what will become of Spain.

Spain's economy is bigger than the economies of Portugal, Ireland and Greece combined. If Spain needs a bailout, the cost to the EU could be "devastatingly high," an economist told the Guardian late last year.

Spain's not in immediate trouble: Bond yields there have held steady recently, even as they've been rising for Portugal and Ireland.

But Spain's not out of the woods yet. The country's troubled regional banks are still a mess, and the unemployment rate is still over 20 percent.

More From Planet Money on Europe's Debt Crisis:

"Marrying Off Spain's Troubled Banks"

"Europe's Debt Solution: More Borrowing"

"Athens And The Bond Kings Of Newport Beach"

"How The Irish Bank Bailout Shook The World" Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

MICHELE NORRIS, host:

And I'm Michele Norris.

Earlier today, Portugal formally requested a bailout from the European Union. It's the third E.U. nation to ask for a lifeline in the past year. Now, if this is starting to sound like business as usual in Europe, we wondered if Portugal's problems signal bigger complications for the global economy.

And here to explain all this is Jacob Goldstein from NPR's Planet Money.

Hey, Jacob.

JACOB GOLDSTEIN: Hi.

NORRIS: So help us understand what just happened in Portugal.

GOLDSTEIN: Portugal is really - it's been in trouble for a while now. Over the past few weeks, the situation for the country went from bad to worse. Portugal's parliament rejected a new round of budget cuts. The prime minister said he was going to resign. And then, the interest rate on Portugal's bond - that's basically how much it has to pay to borrow money from investors - that shot up, and that was basically the last straw.

But really, it's been clear for some time that Portugal was probably going to need a bailout.

NORRIS: So you say the situation went from bad to worse. Why were they in trouble in the first place?

BATES: Well, that's really quite a long-term story. Over years and years, Portugal's debt kept going up and up, and at the same time, the country had really slow economic growth.

One of the reasons for that slow growth is that only about a quarter of the adults in Portugal graduated from high school. So all those high-skilled jobs that really fuel economic growth, those jobs just are not going to Portugal. They're going to other countries. And it's hard to see how they're going to generate the kind of economic growth they need.

NORRIS: Now, we mentioned this is the third country to ask the E.U. for help. Greece and Ireland have already come forward hat in hand. Are all these countries having the same problem?

GOLDSTEIN: Well, I mean, they all need money, right? But when you look at how they got into trouble, it's really striking just how different each story is.

In the case of Greece, the government basically borrowed tons and tons of money and essentially lied about its finances for a long time. In Ireland, it was the banks that sort of went crazy, and then the government tried to bail out the banks, and bailing out the banks made the government get into trouble. And then in Portugal, you saw this long-term problem with growing debt and slow growth.

NORRIS: Can Europe afford all these bailouts?

GOLDSTEIN: Well, the short answer so far is yes. Portugal, Ireland and Greece, these are all small countries. So even though each one has its own big troubles, their bailouts aren't that big relative to the overall European economy. They vary some, but each country needs somewhere in the ballpark of a hundred billion dollars, which Europe can basically handle.

The big worry all along, the big worry still really is Spain. Spain's economy is in pretty bad shape, and Spain's economy is bigger than the economies of Ireland, Greece and Portugal combined. So if Spain needs a bailout, that could really create big problems for Europe and even for the global economy.

NORRIS: Well, you know, people say things happen in threes.

(Soundbite of laughter)

NORRIS: But in this case, are we going to see a fourth bailout?

GOLDSTEIN: Well, it doesn't look like Spain is going to need a bailout right away. They're not going to need a bailout tomorrow or next week. Over the past few weeks and even through today, what we saw was as borrowing costs were shooting up for Portugal, Spain's borrowing costs stayed flat. So that's a good sign. It suggests investors are not panicking about Spain right now, are not refusing to lend Spain money.

But in the longer term, Spain does still have real troubles. A lot of its smaller banks are still in bad shape, and its unemployment rate is way up around 20 percent.

NORRIS: Will these ripples be felt over here in the U.S.?

GOLDSTEIN: The Portugal bailout seems pretty contained. To be honest, I think that was already sort of baked in. People expected that to be coming. So I think the Portugal bailout will not have much of an effect on the U.S.

If Spain needs a bailout, that is big enough that we could likely feel the ripple effects here in the U.S.

NORRIS: Thank you, Jacob.

GOLDSTEIN: Thanks.

NORRIS: That's Jacob Goldstein from NPR's Planet Money team. Transcript provided by NPR, Copyright National Public Radio.