Eurozone problems begin to boil over

A final agreement on a 78 billion euro ($112.3 billion/1.9 trillion Kč) bailout for Portugal's troubled economy was reached May 5 after protracted discussions between the Portuguese government, the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF), but eurozone problems are bubbling up elsewhere from familiar sources, as the EC also looks to lower interest rates on bailout loans to Greece and Ireland.

In regard to Ireland, the new government's push for lower interest payments has been opposed by France and Germany, where leaders want Ireland to either withdraw a veto of plans to harmonize corporate tax rate in Europe or raise its own corporate tax rate.

Greece's own loan rates were cut 1 percentage point in March, but Athens' problems continue to worry investors. Top eurozone policy leaders held talks in Luxembourg May 5 to discuss possible solutions to the sovereign debt problems.

Though ECB President Jean-Claude Trichet and other officials have welcomed the Portuguese deal, it has only further exasperated some EU countries, including the Czech Republic, which may end up having to pick up part of the tab for Portugal's rescue even though the country is not part of the eurozone common currency.

As an EU member, the Czech Republic is the guarantor of the rescue bonds issued by the EC, and could theoretically be on the hook for as much as 13 billion Kč if Portugal defaults on its loans. The Czech Republic will also be making an indirect financial contribution as a participant in the IMF, which is set to provide about one-third of the rescue funds.

Surprisingly, the news of the deal had little effect on the strength of the euro, and observers say the effect on the Czech crown will be equally unremarkable.

"The impact will be minimal if anything because the bailout of Portugal had been widely expected since November of last year, so there is no surprise," said Petr Sklenář, chief economist at Atlantik FT.

Portugal is the third country, following Ireland and Greece, to buckle under sovereign debt and ask for a bailout. While the more prosperous and bailout-weary European countries have voiced strong opposition to the deal, EC President José Manuel Barroso has emphasized the stricter austerity measures required of Portugal in exchange for the bailout, and urged the Portuguese government to move with "utmost urgency" to enact the measures.

Reforming public finance is all well and good, according to Sklenář, but Portugal's problems are incomparable to Greece and Ireland and stem from a much deeper root cause.

"The source of instability in Portugal in comparison to Greece is not just in public finance. Debt burden is huge and growing, but it's not the source of the problem," he said. "The source of the problem is the lack of competitiveness of the Portuguese economy."

Since the deal was announced in Lisbon, fears have been mounting that Spain will be next in line for a bailout. With an economy nearly twice the size of Greece, Ireland and Portugal combined, if Spain followed suit, it would require the largest rescue package yet. Sklenář said this is unlikely, however, since the country has recently started working to get its financial house in order.

"So far Spain is a different story because Spain has shown some stabilization and has reduced pressures from the financial sector," he said. "The next problem is not a bailout of Spain."

Emily Thompson can be reached at
ethompson@praguepost.com