It was only a few weeks ago that the Irish debt crisis caused investors to lose confidence in the sovereign debt of other financially weak EU nations. There has been recent speculation that Portugal will not be able to raise money to fund its deficit on reasonable terms. A bailout of Portugal might cause a panic about the viability of Spain’s finances.
Suddenly, though, there is a rush to buy the debt of troubled eurozone economies and fund those nation’s that are closest to default. The market may believe the actions will have little effect. The value of the euro continues to fall.
China has entered the EU debt market and promised to buy the sovereign paper of Spain. Japan has said it will take a major position in debt about to be issued by the European Financial Stability Facility.
The EU nations themselves may increase their fund to help the most financially troubled countries in the region. There are reports, including one in The Wall Street Journal, that say the EFSF $568 billion fund is too small. In the event that more money is needed on an emergency basis, the amount of capital and credit it holds may need to be much larger.
The credit requirements of Portugal and Spain may strain the fund’s capacity. The only way it can be made larger is that credit guarantees would have to come from German and France, the two largest economies in the region. Both countries, particularly Germany, have been reluctant to put more money into the pot.
Portugal and Spain need to hope that what appears to be a rush to help them will continue. Those who may aid them have very different agendas which means a large coalition among interested parties is impossible. China and Japan have strategic goals in the region. The EU itself has practical goals. It wants to quell talk of contagion which might eventually break up the continent’s alliance.
But, money is money, so Portugal and Spain hardly care who provides it.
Douglas A. McIntyre
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