An option of last resort – that’s how Portugal’s Prime Minister has described the country’s request for a financial bail-out from the EU.
Analysts say the worst-case scenario for the country, long been predicted, may be looming.
It’s estimated that the rescue plan will top $US 100 billion, with anger set to spread around Europe over other EU taxpayers having to pick up the bill.
The country has long resisted taking a bailout, as Greece and Ireland did before.
This may soon exhaust the patience of investors and plunge the global economy into further trouble, according to Karl Denninger of the Market Ticker.
“The first question one has to ask is where is the credibility behind the projections of both the EU and the US? We have heard of stress-tests, we were told that everything was OK; the banks were turning around and buying this debt thinking that they were going to be backstopped and now, all of a sudden, Portugal is not OK and as recently as a week ago we were told they were not going to need a bailout,” as Denninger displays the situation, recalling that the situation with bailouts of the EU member states is repeating itself for the third time, and it looks like this time the markets are going to say that enough is enough.
Karl Denninger believes that Wall Street is not responsible for the new economic black hole called Portugal per se, as it was in the situation with Greece, with allegations connecting it to Wall Street derivatives. In any event, “we will never get to the bottom of it”, Denninger says.
“Portugal is just simply a matter of spending more than making, which is exactly what the US is doing as well, and finally people are throwing up their hands saying “we do not think we’re going to get paid” – and that is where the problem comes from.”
The primary thing to consider, according to Denninger, is credibility, because in the end this is the only thing an entity has, no matter whether it is an individual, a business or a government. Once lost, it is very hard to get it back.
The world economy has pretended it can deal the various manifestations of the global crisis for four years already but “all that has happened is our deficit has skyrocketed”.
The US with its astronomical deficit undoubtedly has a longer leash than Portugal or Spain but even theirs is not infinite.
“The lawmakers in Washington seem to have this idea that they can continue to play this game on an indefinite basis,” Denninger reveals.
“There is a line in the sand beyond which international investors in particular are going to throw their hands up and say “we just not going to deal with that any more” and then the Federal Reserve is left with only bad choices.”