At a time like this Portugal needs all the help it can get. At the press conference after the ECB rate rise last week Trichet said, on more than one occasion and with some deliberation, that he was acting on behalf of all 330 million people in the eurozone. In other words the 11 million souls in Portugal (along with another 11 million in Greece and 4 million in Ireland) could go hang. If higher interest rates caused them more problems then that was the price they would have to pay for the “benefits” of being in the club.
As with all things financial the two main driving forces are fear and greed. We have had the greed when the eurozone was first set up in more accommodating economic times. The future was rosy, the entry criteria to the club were lax and the prospect of much lower, German style, interest rates was just too appealing to resist. That the peripheral countries were wholly unsuited to the straight jacket of a single currency should have been patently obvious, but denial, the third factor in the psychological mix was also abroad.
Currency devaluation to restore competitiveness, much favoured for many years by the Greeks, was no longer an option and the low interest rate regime encouraged speculation, led by the banks, which, as ever, seem incapable of learning the lessons of the past. More denial and much greed ensued, as the regulators ignored the warning signs, and now we are reaching the fearful stage.
The level of fear is determined by the amount of the potential pain (loss) and we are now waiting to see who blinks first. On the face of it the peripherals have little to lose as demonstrated by Iceland. However Greece, Ireland and Portugal have been told that if they so much as think about defaulting on their debt or giving bondholders a haircut no one will ever lend to them again. History says otherwise.
Germany and France, not forgetting the UK (which will be saddled with a £4 billion contribution to the Portuguese bail out despite not being a eurozone member) have the most to lose. The banking system just cannot take anymore shocks without government assistance, which brings another set of problems, as Ms Merkel is finding out via the ballot box. Bailing out the banks or piling on the austerity and you lose votes. Damned if you do; damned if you don’t.
The solution? Portugal needs the “Special One”. His days at Real Madrid are numbered if and when “Barca” lifts the cup. Sounds farfetched? The outgoing PM, Socrates, shares his name with one of the Brazilian greats so why not another football “analogy”. I am afraid it’s the best idea I have got…does anyone have a better one?